Today, we’re going to be talking about a split annuity.

What is a Split annuity?

A split-annuity strategy involves purchasing two types of annuity contracts: immediate and deferred. The immediate annuity would provide a current income stream during the early years of retirement, and the deferred annuity would have the potential to provide a future income stream.

How does a split annuity work?

A split-funded annuity is a type of annuity that uses a portion of the principal to fund immediate monthly payments and then saves the remaining portion to fund a deferred annuity.

What products are purchased in a split annuity?

In a split annuity strategy, you split up your investment so that instead of purchasing one annuity, you purchase two—an immediate annuity and a deferred annuity. A split annuity strategy allows you to achieve two goals. It gives you a guaranteed income stream right now, and it grows your money for the future.

How do annuities pass to heirs?

After an annuitant dies, insurance companies distribute any remaining payments to beneficiaries in a lump sum or stream of payments. It’s important to include a beneficiary in the annuity contract terms so that the accumulated assets are not surrendered to a financial institution if the owner dies.

Let’s say we have a 60-year-old individual who wants to retire, and he needs around $2,500 a month of additional income to live on, along with his social security and a systematic withdrawal of his 401-k. They have around $500,000 that they want to use for achieving their goal of $2,500 per month in guaranteed income.

The first chunk of money which is almost $260,000, we’re able to put into a Single Premium Immediate Annuity, also called a SPIA. This will give them $2,500 a month, guaranteed month in and month out for the next 10 years. This is very easy to understand you give the insurance carrier $260,000. They pay you monthly for the next ten years $2,500 per month. Easy concept.

The rest of the money, which is around $240,000, we’re going to invest this money into a fixed index annuity with a lifetime income rider. This income rider will have an increasing income benefit, which means your annual payout will have an opportunity for increasing income over the years. In ten years, now that the SPIA is completed, the fixed index annuity starts paying out at $2,500 per month. On top of that, your annuity contract has the ability to provide you with increasing income based on positive interest credits you receive from the indexes you have chosen to invest the $240,000 into.

The fixed index annuity I used for this article has no fees. The catch is that they can’t touch income from this annuity for the next 10 years. But that is ok because the SPIA is fulfilling their need with the $2,500 monthly guarantee for the next ten years. In Year 11, suddenly now you’re able to start the income and we projected it will be around $36,000 per year.

So, I can produce the income amount they need when we turn on the income to the fixed index annuity in year 11.

Having the increasing income rider with this annuity, this will keep them ahead of inflation. In the long run protecting their financial future against inflation and protecting your spouse, if one of you passes away.

Unlike social security where one spouse passes, and you lose the lower social security benefit. With the fixed index annuity, the other spouse continues to receive the same income for the rest of their life. Pretty amazing!

I have been involved since 2006 in educating families about the importance of guaranteed income as part of a well-balanced retirement plan. If you’re interested in learning about how they can best serve you in retirement, please call me, Mel Samick 800-839-3536.