Are you confident that you will have enough money to live a long retirement? Many workers are at least somewhat confident that they’ll have enough saved to live comfortably in retirement, but only 27 percent are very confident. Unfortunately, 29 percent of workers are not confident that they’ll have sufficient retirement savings, according to a 2007 Retirement Confidence Survey by Employee Benefit Research.
A split-annuity strategy can help you begin receiving an income stream that has the potential to last well into the future.
Split up, cover ground
A split-annuity strategy involves dividing a lump-sum contribution into two contracts: an immediate fixed annuity and a deferred fixed annuity. The immediate annuity begins paying the contract holder an income right away, while the deferred annuity accrues interest to help provide income in the future.
In the example shown below, a hypothetical individual splits $500,000 between these two types of annuity contracts. He puts $250,000 in the immediate annuity and allocates the other half to a deferred annuity. Because the immediate annuity guarantees a 4 percent annual rate of return, the contract holder is able to collect a $35,000 annual income for eight years.
During this time, the $250,000 in the deferred annuity is also earning a 4 percent annual return, which accumulates on a tax-deferred basis. By the time the immediate annuity is exhausted, the deferred annuity has grown to over $342,000. The contract holder can then begin collecting an income from the deferred annuity.
If the contract holder were to die during the accumulation phase of the deferred annuity (before annuity payments commence), the designated beneficiary would collect the principal plus any interest that had accumulated during the life of the contract.
Most annuities have surrender charges that are assessed during the early years of the contract. Annuity earnings are taxed as ordinary income. Withdrawals prior to age 59½ may be subject to a 10 percent federal income tax penalty.