Retirees deserve sympathy while they have to be content with whatever income they will derive from Social Security and pensions. It's tough to find a new job at age 65 and there is no denying that very often they are in need of some guaranteed extra income.
As a retiree, you might possess some surplus money which you can viably deploy to generate additional income. Nevertheless, you will obviously want to be invested careful and safely and not risk the principal amount. So, you'll have to explore other ways of receiving additional income while preserving your precious principal.
One option is certificates of deposit (CD) that are federally insured. But if you look at the low interest rates you will be dismayed.
Another option would be split annuity that will offer income without diminishing you annuity value. In fact, a split annuity cannot be regarded as a single annuity policy. It may be far better defined as a combination of two annuity items - a single premium tax deferred annuity that grows in value for your upcoming needs (and will replace the annuity value diminished by the other part) and a single premium immediate annuity that offers income in order to meet present needs, but loses value.
The immediate annuity will generate a steady annuity income stream that is assured for a number of years that you choose (typically 5 to 20). At the end of the time frame, the immediate annuity will be fully paid out and nothing will be left. But you have also placed, at the beginning, money into a deferred annuity which has grown in annuity value.
As a hypothetical example, let's assume that you can get interest of 5% on a split annuity. Let's also assume that you could get the same rate at the bank for a CD. We'll appropriately split the same $100,000 investment and attribute a 5.0% rate for the immediate annuity, and 5.0% for the deferred annuity premiums. The table shows you the hypothetical investment split and results for a term of 8 years.
Even for annuity interest rates comparable to the CD, the immediate annuity leaves you with a yearly after tax annuity income of $4,713 compared to the $3,600 of the CD – almost 31% more income. 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. However, if additional expenses or costs were present, they would reduce performance.
|Immediate Annuity||Deferred Annuity|
|Single Premium: $32,000 Interest rate: 5.0%
Term: 8 years
|Single Premium: $68,000 Interest rate: 5.0%
Term: 8 years
|yearly income (82.9% untaxed)||taxable portion||After 28% tax income||Initial investment
|Final annuity value (at 8 years)|
|$ 4,951||$ 847||$ 4,713||$ 68,000||$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 almost refreshed your original investment with the deferred annuity value at the end of 8 years.
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