Retirees deserve sympathy while they have to be content with whatever income they will derive from Social Security and monthly pensions. There is no denying that frequently they are in need of some guaranteed extra income.
As a retiree, you could possibly possess some surplus money which you can viably deploy to generate additional income. Nevertheless, you will obviously want to be further careful and not risk your retirement next egg. While one option is the certificate of deposit at the bank that's federally insured, you may not be too excited about the 2% rate for 5 years.
Yet another sound solution may be split annuities. The split annuity is a combination of two annuities - a single premium tax deferred annuity that increases in value for your long term needs and a single premium immediate annuity that offers current income to fulfill present needs. Immediate annuities alone have a major drawback -- when the payment stream is completed, there is no principal remaining. The deferred annuity compensates for that.
You split your investment into paying the single premium for the two annuities in a ratio that will fulfill your time horizon and income needs. The longer the time horizon you can select, the better you will be able to structure the annuities to your benefit and get more income.
Let's look at an example to clarify how to use the annuities in combination.
Assume that you can get a split annuity and your time horizon is 10 years and you have $100,000 to invest. If you invest the entire $100,000 in an immediate annuity, assuming you are an age 70 male, you can collect $698 monthly for life. But this will leave nothing to heirs.
So instead, you place $$35,000 into an immediate annuity that will make payments for 10 years and you receive $320 monthly. The remaining $65,000 (at 4.31%), you place into a deferred annuity.
The immediate annuity leaves you with a yearly after tax annuity income of $3,742 compared to the $1,440 of the CD at current rates. 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. At the end of 10 years, immediate annuities have nothing left but in this case, your deferred annuity has grown back to your original $100,000.
|Immediate Annuity||Deferred Annuity|
|Single Premium: $35,000
Term: 10 years
|Single Premium: $68,000 Interest rate: 4.31%
Term: 10 years
|yearly income (91% untaxed)||taxable portion||After 28% tax income||Initial investment
|Final annuity value (at 10 years)|
|$ 3,494||$ 345||$ 3,742||$ 65,000||$100,000|
Thus, in the ultimate examination, you would have consistently enjoyed a monthly annuity income arising out of your immediate annuity and would have also refreshed your original investment with the deferred annuity value at the end of 10 years. You now understand and see the potential use for split annuities.