Split Annuity Strategy
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When financial markets turn volatile, some investors show their frustration by fleeing the markets in search of alternatives that are designed to offer stability.
For example, in the first quarter of 2018, investors pulled $63 billion from U.S. stock funds based on uncertainty over market direction.1
For those looking for a way off Wall Street’s roller-coaster ride, annuities may offer an attractive alternative.
Annuities are contracts with insurance companies. The contracts, which can be funded with either a lump sum or through regular payments, are designed as financial vehicles for retirement purposes. In exchange for premiums, the insurance company agrees to make regular payments — either immediately or at some date in the future.
Meanwhile, the money used to fund the contract grows tax deferred. Unlike other tax advantaged retirement programs, there are no contribution limits on annuities. And annuities can be used in very creative and effective ways.
One strategy combines two different annuities to generate income and rebuild principal. Here’s how it works:
An investor simultaneously purchases a fixed–period immediate annuity and a single premium tax-deferred annuity, dividing capital between the two annuities in such a way that the combination is expected to produce tax-advantaged income for a set period of time and restore the original principal at the end of that time period.
Keep in mind that any withdrawals from the deferred annuity would be taxed as ordinary income. When the immediate annuity contract ends, the process can be repeated using the funds from the deferred annuity (see example). Remember, the guarantees of an annuity contract depend on the issuing company’s claims–paying ability.
Diane divides $300,000 between two annuities: a deferred annuity with a 10-year term and a hypothetical 5% return, and an immediate annuity with a 10-year term and a hypothetical 3% return. She places $182,148 in the deferred annuity and the remaining $117,852 in the immediate annuity. Over the next 10 years, the immediate annuity is expected to generate $1,138 per month in income. During the same period, the deferred annuity is projected to grow to $300,000 — effectively replacing her principal.
Variable annuities are sold by prospectus, which contains detailed information about investment objectives and risks, as well as charges and expenses. You are encouraged to read the prospectus carefully before you invest or send money to buy a variable annuity contract. The prospectus is available from the insurance company or from your financial professional. Variable annuity subaccounts will fluctuate in value based on market conditions and may be worth more or less than the original amount invested if the annuity is surrendered.
Source: Financial-Planning.com, February 2, 2018
1. 1. CNBC.com April 3, 2018
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