How to Build My Own Annuity

An annuity is a ladder of investment maturities.

An annuity is a ladder of investment maturities.

An annuity is a well-planned investment portfolio created by an insurance company, so it is possible for anyone with the time, knowledge and perseverance to build something similar. Insurance companies buy investments at institutional rates that are less expensive than you can access, because they normally buy hundreds of millions of dollars worth of securities every day. However, you can create a portfolio to provide dependable income, for as long as you manage it properly. The key is constant objective management.

Open a self-directed tax-sheltered investment account such as an IRA or 401K at your local bank or securities broker. This will allow you to collect interest and profits in the account without having to pay income taxes and compound your investment income. Because laws affecting such accounts change, consult a professional financial adviser where you open your account to determine the best choice for your intended purpose. Ask whether to put dividend-paying stocks in a separate taxable account. Many advisers suggest building a portfolio of dividend-paying stocks in a taxable account because dividends are taxed at a lower rate than ordinary income. However, the tax treatment of dividends can change, so you may want them in a tax-sheltered account, instead. In case you need money for an emergency, choose an account you can borrow against without selling the securities within.

Create a realistic estimate of the amount of money you will need your annuity to supply in income. This gives you an idea of how much principal money your annuity will require to return the income stream you desire. It also gives you a goal and incentive to continue to build your annuity over the years.

Learn about U.S. Treasury bonds, corporate bonds, certificates of deposit, preferred stock and dividend-paying common stock including utilities and high-quality industrial stocks. These fixed-income securities will form the core of your annuity. Also, learn about bond laddering. An annuity is, basically, a large bond ladder.

Ladder your bond investments. When you begin to build your annuity, divide your money into 5 or 10 equal amounts, depending on the size of your first investment. If interest rates are at historically low levels, invest each chunk of money in a certificate of deposit or Treasury bill, depending on which yields more. Maturities should be laddered in year increments. As each security matures, invest it in a longer maturity instrument. During periods of historically average or high interest rates, ladder your maturities out to 30 years and continue filling in missing years as you add more money. Ideally, you will have bonds maturing every year, out to 30 years.

Reinvest interest you receive in certificates of deposit or Treasury bills out to one year. Ladder these investments to mature monthly or quarterly. Accumulate your interest income in these short-term investments until you have enough to fill in a missing year in your long-term ladder or spread the money out over a particularly high-yielding section of the yield curve. Some advisers suggest using your interest income to buy dividend-paying stock because its value tends to keep up with inflation.

Items you will need

  • Bond calculator
  • Interest rate calculator
  • Retirement planning calculator


  • Monitor the latest economic expectations and reports of Federal Reserve monetary policy. It is not recommended that you actively manage your annuity portfolio, buying and selling your securities, unless you have a good reason. Check the math of any moves you consider making. If you take profits in one maturity, you should be able to use the proceeds of your trade to pick up additional investment yield in the security you are planning to buy without harming the symmetry of your bond ladder.


  • Don't try to create an annuity immediately. One of the benefits of building your own annuity is that you can ladder your investments out to five years if you start when interest rates are low, and reinvest in longer maturity bonds at a later date when interest rates rise. This will increase your income from the annuity but will require you to learn about the economy, Federal Reserve monetary policy and bonds. It will also require discipline on your part not to sink money into a speculative stock while waiting for a turn in interest rates, or forget to constantly monitor your portfolio.

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About the Author

Victoria Duff specializes in entrepreneurial subjects, drawing on her experience as an acclaimed start-up facilitator, venture catalyst and investor relations manager. Since 1995 she has written many articles for e-zines and was a regular columnist for "Digital Coast Reporter" and "Developments Magazine." She holds a Bachelor of Arts in public administration from the University of California at Berkeley.

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