Use a Split Annuity Strategy for More Income

5 Nov

As a retiree, you may have Social Security income and some pension income too. But you may want an additional but assured income to round out your financial planning for retirement. You have some investment money you can generate income with but you are leery of losing your principal because you may have to rely on that income for a long time.  What is an appropriate strategy for generating income but preserving your principal?

You could use a certificate of deposit (CD). It is federally insured. The interest rate you will get depends on how long you tie up your money in the CD. A longer term CD typically produces a higher rate. CD’s are conservative securities representing the lower region of interest rate offerings.

Nevertheless, at, say, 5% interest you can take $5,000 per year and preserve your $100,000 principal.  This interest income is fully taxed and you would be left $3,300 with under a 28% tax bracket. Let’s try a better strategy…

A strategy that can give you more income–and will also tie your money up for while–uses a Split Annuity. Actually a Split Annuity is not an annuity policy. It is simply a combination of two annuity products. A single premium tax deferred annuity (SPDA) and a single premium immediate annuity (SPIA). 

What you do here is split your investment to pay the single premium for each of two annuity policies.  You will pay the single premium immediate annuity to produce an immediate income stream guaranteed for a certain period of time. At the end of the term, all investment in this annuity will be used up.

With the remainder of your investment, you will pay the single premium of the deferred annuity for the same term. The purpose of the deferred annuity is to grow this single premium payment back to at least the amount of your full investment amount before the split.

So at the end of the term, you will have received a yearly income from the immediate annuity and have replenished your investment with the deferred annuity. But you will need an interest rate on each to achieve this. Annuities do not carry the federally insured protection of CD’s, but fixed annuities are regulated as insurance products and can offer guaranteed rates. This lends a good deal of security to your investment.
As a hypothetical example, let’s conservatively assume that you can get interest rates at least comparable to the CD analyzed above . We will appropriately split the same $100,000 investment and attribute a 5.0% rate for the immediate annuity, and 5.0% for the deferred annuity premiums.  The table shows you the hypothetical investment split and results for a term of eight years.

Immediate Annuity

Single Premium: $32,000, Interest rate: 5.0%

Term: 8 years

Yearly income (82.9% untaxed)

Taxable portion


After 28% tax income

$ 4,951

$ 847

$ 4,713

Deferred Annuity

Single Premium: $68,000, Interest rate: 5.0%

Term: 8 years

Initial investment


Final investment value (at 8 years)

$ 68,000


Even for annuity rates comparable to the CD, the immediate annuity leaves you with a yearly after tax income of $4,713 compared to the $3,600 of the CD – almost 31% more income. Note that no fees or expenses were incorporated into the annuity values illustrated, as typically, in the case of fixed annuities, the stated interest rate is net of commissions and fees. However, if additional expenses or costs were present, they would reduce performance.

Do you want to understand more about annuities?  Order you FREE copy Annuity Owner Mistakes.

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