Retirement Read Time: 5 min

Split Annuity Strategy

When financial markets turn volatile, some investors show their frustration by fleeing the markets in search of alternatives that are designed to offer stability.

For example, in the first quarter of 2020, the S&P 500 lost nearly 20% of its value, over $5 trillion, due to market volatility.1

For those looking for a way off Wall Street’s roller-coaster ride, annuities may offer an attractive alternative.

Annuities are contracts with insurance companies. The contracts, which can be funded with either a lump sum or through regular payments, are designed as financial vehicles for retirement purposes. In exchange for premiums, the insurance company agrees to make regular payments — either immediately or at some date in the future.

Meanwhile, the money used to fund the contract grows tax-deferred. Unlike other tax-advantaged retirement programs, there are no contribution limits on annuities. And annuities can be used in very creative and effective ways.

The Split

One strategy combines two different annuities to generate income and rebuild principal. Here’s how it works:

An investor simultaneously purchases a fixed–period immediate annuity and a single premium tax-deferred annuity, dividing capital between the two annuities in such a way that the combination is expected to produce tax-advantaged income for a set period of time and restore the original principal at the end of that time period.

Keep in mind that any withdrawals from the deferred annuity would be taxed as ordinary income. When the immediate annuity contract ends, the process can be repeated using the funds from the deferred annuity (see example). Remember, the guarantees of an annuity contract depend on the issuing company’s claims-paying ability.

Diane Divides

Diane divides $300,000 between two annuities: a deferred annuity with a 10-year term and a hypothetical 5% return, and an immediate annuity with a 10-year term and a hypothetical 3% return. She places $182,148 in the deferred annuity and the remaining $117,852 in the immediate annuity. Over the next 10 years, the immediate annuity is expected to generate $1,117 per month in income, with a few dollars left at the end of the period. During the same time, the deferred annuity is projected to grow to $296,700 — effectively replacing her principal.

Annuities have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. Most annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contract. Withdrawals and income payments are taxed as ordinary income. If a withdrawal is made prior to age 59½, a 10% federal income tax penalty may apply (unless an exception applies). Annuities are not guaranteed by the FDIC or any other government agency. With variable annuities, the investment return and principal value of the investment option are not guaranteed.

Variable annuities are sold by prospectus, which contains detailed information about investment objectives and risks, as well as charges and expenses. You are encouraged to read the prospectus carefully before you invest or send money to buy a variable annuity contract. The prospectus is available from the insurance company or from your financial professional. Variable annuity subaccounts will fluctuate in value based on market conditions and may be worth more or less than the original amount invested if the annuity is surrendered.

1.YCharts.com, 2022

The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright FMG Suite.

Share |

Free Retirement Guide

It's never too soon to start preparing for retirement. But do you know what to look out for? Download our free ebook, "Retire Happy: A Simple Guide to Your Next Big Adventure."



Thank you! Oops!
 

Related Content

5 Tips for Self-Care in Tough Times

5 Tips for Self-Care in Tough Times

With the current landscape creating changes—and challenges—for everything from our day-to-day routines like the way we shop for necessities to employment risks and realities, the need for self-care has never been more important.

5 Ways for Caretakers to Make Your Well-Being a Priority

5 Ways for Caretakers to Make Your Well-Being a Priority

Studies show that now more than ever, today’s women are disproportionately responsible for caring for children, doing laundry, cooking and cleaning, despite many having full-time careers. What’s more, when compared to their male counterparts, women are also more likely to report having difficulty finding the time to manage their physical, mental and emotional health.

To Catch a Thief

To Catch a Thief

Having your identity stolen may result in financial loss plus the cost of trying to restore your good name.

 

Have A Question About This Topic?







Thank you! Oops!

The Big Picture–Little Focus on Big Issues

If the stock market is hitting record highs, why aren’t money managers feeling the love?

Filing Final Tax Returns for the Deceased

The federal government requires deceased individuals to file a final income tax return.

Insurance Needs of Small Business Owners

The dreams of small business owners and the business plans that outline the strategy to fulfill those dreams rarely include the insurance protections that business owners will need. Yet, having adequate protection can...

View all articles

My Retirement Savings

Estimate how long your retirement savings may last using various monthly cash flow rates.

Taxable vs. Tax-Deferred Savings

Use this calculator to compare the future value of investments with different tax consequences.

What Is the Dividend Yield?

This calculator helps determine your pre-tax and after-tax dividend yield on a particular stock.

View all calculators

5 Smart Investing Principles

Principles that can help create a portfolio designed to pursue investment goals.

An Inside Look at Retirement Living

A number of questions and concerns need to be addressed to help you better prepare for retirement living.

5 Smart Investing Strategies

There are some smart strategies that may help you pursue your investment objectives

View all presentations

Inflation and Your Portfolio

Even low inflation rates can pose a threat to investment returns.

The Real Cost of a Vacation Home

What if instead of buying that vacation home, you invested the money?

Global and International Funds

Investors seeking world investments can choose between global and international funds. What's the difference?

View all videos