Split Annuity Strategy and How It Works

By Drew Gurley

When planning for retirement, one of the biggest challenges is finding a way to generate reliable retirement income now while also preserving a portion of your nest egg for the future. One approach to this balancing act is using the split annuity strategy.

Although the name can be confusing, a split annuity isn’t a single annuity contract that gets divided. Instead, it’s a coordinated plan using two types of annuities such as an immediate annuity and a deferred annuity.  This combination creates both immediate cash flow and long-term growth potential all while protecting your hard earned money.

My name is Drew Gurley and I’ve been helping people with safe money solutions using insurance products like annuities for nearly 17 years.  Please reach out if you have any questions at all.

How Spit Annuity Strategy Works

Here’s how a split annuity strategy works:

1. Immediate Annuity: First, you take a portion of your funds and contribute into an immediate income annuity that begins making fixed payments or regular payments right away. These predictable payouts can cover daily expenses or supplement Social Security income.
2. Deferred Annuity: The other portion goes into a deferred annuity (often a fixed annuity) where the money grows on a tax-deferred basis for a period of time such as a 7 to 10-year term. The deferred contract works towards building back the original principal while potentially earning a competitive interest rate.

Together, this creates an income stream today while preparing future income for later and protecting from market downturns.

Benefits of a Split-Funded Annuity

A split-funded annuity strategy offers several advantages:

• Immediate Income: The immediate annuity provides guaranteed cash flow you can count on.
• Tax-Deferred Growth: The deferred annuity accumulates value without paying income tax until withdrawals are made, giving you a tax-advantaged boost.
• Flexibility: You can customize how much goes into each side of the strategy based on your investment objectives and specific situation.

Things to Consider

Like all annuity products, a split annuity comes with considerations and isn’t always a fit for everyone.

• Liquidity: Money inside an annuity contract isn’t as flexible as a financial vehicle like a savings account. Access may be limited, and early withdrawal could trigger surrender charges, withdrawal penalties, or even an IRS tax penalty if you’re under 59½.
• Ordinary Income Tax: When you take annuity earnings out, they’re taxed as ordinary income, not capital gains.
• Market Conditions: The rate of return available from the deferred portion depends on current market conditions and the issuing company’s offerings and guarantees.
• Inflation Risk: While the immediate annuity guarantees fixed payments, those payments may lose purchasing power over time.
• Insurance Company Strength: Both annuities rely on the claims-paying ability and financial strength of the insurance company. It’s important to review ratings from agencies like A.M. Best, not just depend on a government agency to provide security.

Who Is a Split Annuity Right For?

A split annuity strategy is often a fit for retirees who:

• Want retirement plans that create immediate income without using up their full nest egg.
• Value predictable annuitization payments from one contract while allowing another to grow for a specified period.
• Prefer fixed annuity options over variable annuity exposure to Wall Street markets.
• Have single premium funds available, such as a lump sum from savings or other retirement savings vehicles.

Why Work With an Agent

Implementing a split-funded annuity strategy is about matching the right annuity products, evaluating interest rates, and aligning the plan with your long-term financial goals.

That’s where working with an experience insurance agent comes into play.

As a licensed insurance agent and experienced guide, I collaborate with financial advisors, CFPs, and even recommend consultation with a tax professional for legal advice on how payouts and taxes may impact your specific situation.

My role is to help you navigate options, review annuity contracts, and ensure your strategy fits your needs.

Next Steps

A split annuity strategy can provide the best of both worlds: guaranteed immediate income today and future income for tomorrow.

By dividing your funds between an immediate annuity and a deferred annuity, you can generate retirement income while implementing a strategy to preserve your original principal over period of time by leveraging the right type of deferred annuity product.

If you’re considering a split-funded annuity, let’s talk. I’ll walk you through the options, evaluate carriers’ financial strength, and design a plan that fits your unique needs.