When you retire, you will rely on several sources for your fixed income. This will include your Social Security benefits and personal savings, as well as your retirement savings. You can manage these sources better by supplementing them with a split annuity. This is the best method for ensuring your retirement wealth will last for as long as you will need it.

What is an Immediate Fixed Annuity?

When looking at a split annuity, you’ll find that it’s divided into two different aspects. The first is an immediate fixed annuity, which pays dividends at a guaranteed rate of return. The dividends you’ll receive from this annuity will be enough to cover your income needs once you start your retirement. You will continue to draw on your immediate fixed annuity until those funds are depleted.

What is a Deferred Annuity?

The second part of a split annuity is the deferred annuity. The funds in this annuity will grow as you draw on the immediate fixed annuity. During this time, you will not have to pay taxes on the money in your deferred annuity. However, once you start to draw on these funds, you will pay income taxes on the amounts you receive. 

An insurance company will set up the deferred annuity for you, and you can fund it with one lump sum or make contributions throughout your life. When you retire, the insurance company will pay you an income from those contributions according to the payment schedule you arrange with them.

What Are the Drawbacks of a Split Annuity?

It’s important to know that there are fees and penalties associated with a split annuity. Before you start one, talk to your insurance representative about these hidden costs. For example, there may be contracted limitations, monthly fees for expenses, administrative charges, and other fees. There will also be charges for early withdrawals, and you will face a tax penalty for drawing out your funds prior to age 59 1/2. 

Many people fail to save enough for retirement and end up going back to work. You can avoid this situation by talking to your financial advisor about setting up a split annuity today. Your advisor can also help you modify your investing strategy so you will meet your retirement wealth goals.