How to Take the Worry Out of Retirement: Using a Split Annuity Strategy

Today’s retirees look for three things when they sit down with you to lay out their retirement strategy: guaranteed income, growth potential, and longevity insurance that gives them the freedom to spend without fear about the future.

It sounds like quite a wish list, but it can be done using the split annuity strategy. Here’s how it works:

One day, Bob walks through your door – a recently retired 65-year-old with $300,000 in savings. He has the usual concerns about outliving his income, and figures that means eyeing every penny he spends. You tell him you know a way that he can spend without worry.

You suggest he split his nest egg into three buckets, each serving a distinct purpose.

1. First, $130,000 goes into a 10-year period certain single premium immediate annuity (SPIA) with a payout step-up in year six, providing guaranteed income.
2. Next, $130,000 goes into variable annuities or equity instruments, providing growth potential.
3. Finally, $40,000 goes to a single-premium deferred payout annuity that starts paying at age 85, providing longevity insurance.

Bob’s big payoff

During the first 10 years of his retirement, Bob collects monthly income from his SPIA — $1,068 for years one through five and $1,238 for years six through 10 — while the money grows in his second bucket. Bob can freely spend during these years because he knows that additional income will kick in when he hits age 85.

By the time Bob reaches age 75, the $130,000 in his growth bucket should have doubled, based on the “Rule of 72.”

• He reinvests $160,000 of that money in a 10-year period certain SPIA, collecting $1,315 per month for years one through five and $1,525 per month for years six through 10.
• He puts the remaining $100,000 in variable annuities or equity instruments, restarting the cycle.

When he blows out the 85 candles on his birthday cake, Bob has an additional reason to celebrate: His longevity insurance begins paying him $1,821 per month for the rest of his life, plus he has $200,000 in his nest egg from growing his other investments.

Remember the split annuity strategy whenever you notice nervous clients clutching their wallets a little too tightly. It can be an easy — and effective — way to put the fun back into retirement for them.

Laura Hahn is managing director of the Annuity Center for The Marketing Alliance (TMA). She can be reached at 314-275-8713 or [email protected].