Split Funded Annuities
By Kevin Dufficy
which provides regular payments for a fixed period, while the latter is an accumulated account which accumulates cash value at interest. The value of the deferred annuity generally equals the combined value of the premiums paid for both annuities by the time the fixed annuity payments dry up.
The immediate fixed annuity will provide a steady income stream during the early years of retirement, thus offsetting the loss of your salary, while the variable deferred annuity builds up a nest egg which you can depend on for the later years. If properly managed, a split annuity strategy can fulfill all your needs, both present and future.
Advantages for Investors
This kind of arrangement gives the investor the best of both worlds – A secure income and the flexibility to invest funds into assets with higher gains than traditional retirement investments. The tax deferred annuity also allows for additional partial withdrawal and avoids probates. Additionally, by annuitizing the deferred annuity at a later date, the investor can continue to receive regular payments even after the fixed annuity payments are complete.
In effect, when you buy a split annuity, you not only secure a regular flow of income, but also preserve your principal investment amount, which you can then dip into for further needs. As an illustration, consider that you have $200,000 and no other source of income. If you use this money for paying the bills, while letting the rest accrue interest or gain value via mutual funds, you would run out of money in 13-15 years. So, if you start this process at age 59, you're bankrupt sometime between 75-80 years of age. This is where investing into a split annuity can help you.
Let's say you buy a split annuity by investing $200,000, with $96,000 going towards an immediate fixed annuity and the remaining $104,000 you put into the variable deferred annuity. What happens is that you end up receiving monthly payments from SPIA to help pay the bills for 10 years. After the 10 year period, the payments from the fixed annuity stop, while the amount in the SPDA is now in the region of $200,000. This means that buying a split annuity when you are close to retirement will ensure that you have enough funds to cover your entire lifetime.
Please consult with your financial advisor to make sure you are aware of the exact amount and nature of the tax deferral benefits, return rates, associated annual charges and early withdrawal penalties for annuities imposed by the IRS and the surrender charges deducted by the issuing insurance company.
About Kevin Dufficy
Kevin Dufficy is a seasoned financial expert having written articles and blogs on a wide range of financial, investment and retirement planning topics. He has an MBA from UC Berkeley, and a degree from H.E.C., the leading French business school in Paris, France. To follow Kevin"s profile, click here.