Annuity Retirement Plan Strategies

You worked, you saved, you paid off debt, you invested.

Now it’s nearing the time when you need to consider how to get money out of your investments in order to leave the workforce and enter retirement. It’s a wonderful problem to have, but the question needs to be addressed: “Do I have enough to retire, and how do I get money out of my accounts to remain retired?”  Enter the need for retirement income planning.

At the core of a retirement income plan is either Social Security Income or a retirement pension that provides monthly income for life. If a retiree’s typical monthly expenses exceed the income provided by Social Security or the pension, then additional retirement income will need to be generated from retirement accounts like IRAs, 403(b)s, 401(k)s, etc. Withdrawals from these accounts can occur monthly, creating another source of ongoing income to allow retirement expenses to be paid. 

There are a number of ways to do this. One way involves the use of investing strategically in stocks and bonds in order to live off of the stock dividends and bond interest. Another way is to allocate money to an annuity retirement plan. 


“What is an Annuity and How Does It Work?”

But what is an annuity? In short, an annuity is a contract between you and an insurance company. Most annuities offer some form of guarantee that requires an insurance company to be involved. The one annuity that often provides little to no guarantees is a variable annuity, which looks and operates much like a mutual fund account, but you may choose to pay for additional riders that provide guarantees on an otherwise non-guaranteed variable annuity account. This is a topic for any day. For now, let’s agree that we’re referring to annuities that are guaranteed to either protect the account owner from market losses or agree to provide a guaranteed income for a specified period of time, or both (there are a lot of variations available).

Once a person decides that they want a portion of their nest egg - their accumulated retirement savings - protected in some form or another, they’re either going to a bank for CDs or they’re considering which annuity or annuities to buy from an insurance company. Since annuities were designed to provide retirement income, let’s focus on the ways in which they can be utilized for retirement income planning.  

Annuity Retirement Plan: Flooring

Two time-tested ways in which annuities can be used in retirement income plans are often called ‘Income Flooring’ and “Bucketing’. Income flooring involves a 20-year or a lifetime income annuity to convert a lump sum of money into a guaranteed income stream. By have a lifetime income paid from an annuity, that monthly income is added to Social Security or a pension income to provide a ‘floor of income’ that is used to pay a retiree’s normal living expenses. Any larger or out-of-the ordinary expenses would be paid from other accounts or income sources. But it’s the floor of income that provides a retiree the peace of mind from knowing their basic lifestyle costs are covered using guaranteed income sources. 

What’s the downside of an annuity retirement plan that utilizes a lifetime payout annuity? When a retiree sees how much money they have to trade in order for the insurance company to provide a lifetime guaranteed income, they often turn pale and begin to have second thoughts. It doesn’t make the strategy less effective, but psychologically, giving up control of so much money for a lifetime can feel financially limiting. So, what’s an alternative to a ‘flooring’ annuity retirement plan?

Annuity Retirement Plan: Bucketing

An alternative to income flooring is called ‘Bucketing’. Using multiple ‘buckets of money’ is an investing strategy that allocates assets to ensure that risk was being well-managed and income would last for the duration of a person’s (or couple’s) entire retirement without the need to use an irrevocable lifetime annuity at the very beginning of a (hopefully) very long retirement. 

What is bucketing? Bucketing (also called age-banding) can be defined as an approach to developing retirement income that segments retirement assets by category. While categories may be based on risk level of certain assets, the buckets can also be segmented by time periods designed to cover the lifespan of the retiree. An example is a 3-bucket plan, with bucket 1 designed to cover years 1-5 of retirement, bucket 2 earmarked for years 6-10, and bucket 3 covering years 11+.

Bucketing, as compared to stock market probability based methods of retirement income planning is a safety-first approach. Bucketing can provide substantial psychological benefits to retirees by using age-based buckets in sequence. This allows a retiree to pair investments of increasing risk or guaranteed return products like annuities with the time segment that best matches the chosen investment or product. Put another way, the money that needs to be available first during retirement should be placed into the first bucket, while money that won’t be needed for many years to come is placed in the second or third buckets.

Offering pension-like income certainty, bucketing has the added benefit of breaking the long time horizon of retirement into smaller segments. Bucketing allows you to utilize several smaller investment or product allocations in age-banded buckets. That way, if the markets change dramatically, the assets placed in the buckets can be adjusted to respond. It’s a form of diversification that also pairs products more closely with expected timeframes of use.

Annuity Retirement Plan: Bucketing

There are a number of ways to fund the buckets. For example, you can invest increasingly risky assets in each successive bucket. Or, you can build the entire income plan in a guaranteed manner by using 5-year payout annuities in the first two buckets, with a lifetime income rider annuity product in the third bucket, allowing the strongest guaranteed growth of income benefits. With either direction the retiree chooses – a risk-based bucketing strategy or one of the many guaranteed options – if the retiree’s needs change, there is still flexibility available to change the future buckets. If the retiree passes away before ‘turning on’ the income from all the buckets, any remaining account balances will pass to heirs, thus avoiding the premature death risk of some other strategies like income flooring discussed above.

By pairing the retirement income needed with the income derived from the bucket plan, any remaining ‘extra’ money is freed-up from income generation duties and is able to remain at-risk in the stock and bond markets for purposes of discretionary wants, inflation protection, long term care needs, and giving. 

With these extra discretionary investment assets, the principles of prudent investing still apply, but the need for those assets to generate consistent income has been removed, thanks to the income generated by the buckets.

“Are There Downsides to Retirement Bucketing?”

What are the downsides to bucketing? For one, the multi-bucket approach can be a bit more complex than other models that use a single source of income. Bucketing also requires a broader access to products in order to build it effectively.

Generally, no single insurance company or investment manager will offer the most competitive options for all the buckets. Bucketing tends to work best with a combination of guaranteed income products and risk-based investments, so dually-licensed advisors can have an advantage when building a bucketed plan.

With all of this in mind, for who might a bucketing approach be suitable?

  • Retirees who wish to transfer various risks such as: market, sequence of returns, frailty, and advisor risk,
  • Those who wish to maximize income predictability, 
  • Retirees who desire a balance between predictable income and asset flexibility,
  • People who are comfortable using insurance-based products and/or individual bonds to generate income,
  • Those who wish to have a complete income planning methodology that leverages the best attributes of each asset for its best use.

While this discussion was never intended to be an exhaustive analysis of income flooring or bucketing, I hope it inspires you to learn as much as possible before committing your retirement assets to an annuity retirement plan or any income planning strategy. As a safety-first approach, bucketing offers a lot of flexibility for those families who wish to provide certainty and reliability of income, while flooring offers the simplest set-it-and-forget-it approach, but much less flexibility if circumstances change during retirement.

In an era of ever-increasing complexity and retiree lifespans, retirees face an unprecedented responsibility to plan their retirement income prudently. Being aware of the various types of retirement income planning strategies allows for the best chance of alignment between preference, needs, and investment types.

Meet Our Team

Adam Cufr

Adam Cufr


Principal, Retirement Income Certified Professional®

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Dave Bensch

Dave Bensch

Director of Operations

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Stephen Hanley

Stephen L. Hanley


Chief Investment Strategist

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Providing annuity retirement planning services to Northwest Ohio and Southeastern Michigan including the communities of Toledo, Bowling Green, Sylvania, Perrysburg, and Findlay.

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Fourth Dimension Financial Group

27121 Oakmead Dr. Suite B
Perrysburg, OH 43551

Phone: (419) 931-0704
Email: dave@fourthdimensionfinancial.com