Retirees deserve sympathy as they have to be content with whatever income they derive from Social Security and pension. There is no denying that quite often they are in need of some assured extra income.
As a retiree, you may possess some surplus money which you can profitably deploy to generate additional income. But you will obviously want to be extra careful and not risk your principal amount. So, you will have to explore other ways of obtaining additional income while preserving your hard earned principal money. Many retires turn to annuities for a combination of safety and income.
A split annuity can offer consistent annuity income. Strictly speaking, a split annuity can not be considered as one annuity policy. It may be better defined as a combination of two annuity products - a single premium tax deferred annuity that appreciates in value for your future needs and a single premium immediate annuity that offers annuity income to meet present needs.
What you are required to do is to split your money into paying the single premium for each of two annuity policies. The single premium immediate annuity will generate an annuity income stream that is assured for a number of years that you choose. The annuity income payment will include both your principal and interest so that at the end of the time period selected, there will not be any principal left in the immediate annuity.
You will use the balance of your investment money to pay the single premium for the deferred annuity for the same time period. As you are aware, the objective of the deferred annuity is not to provide you any annuity income now, but to let it grow into at least the full investment amount you had prior to the split. For sake of clarity, this information can be restated in a tabular form using a 15 year term at a 4% rate on the deferred annuity as a hypothetical example illustration of the annuity payments and growth:
|Immediate Annuity||Deferred Annuity|
|Single Premium: $44,474
Term: 10 years
|Single Premium: $55,526 Interest rate: 4%
Term: 15 years
|yearly income (91% untaxed)||taxable portion||After 28% tax income||Initial investment
|Final annuity value (at 15years)|
|$ 3,564||$ 606||$ 3,394||$ 55,526||$100,000|
If you calculate your cash on cash return ($3394/44474) from the immediate annuity, it is 7.6% after tax. Where can you get such an attractive cash payout with the same degree of safety in 2011?
Thus, in the ultimate analysis, you would have consistently enjoyed a monthly annuity income arising out of the immediate annuity and would have also almost replenished your original investment with the deferred annuity.
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