In our last article we discussed the high level of interest among Baby Boomers in post-retirement income.  We talked about the use of guaranteed income options available with a number of variable investment products.  While these are valuable options, they do have two drawbacks; the income is not adjusted for inflation, and virtually all of the income is subject to income tax, reducing the net by as much as 41%.

An exceptional option addresses both of these shortcomings; it is the Split Annuity.  This is a combination of an income annuity and a deferred accumulation annuity.  The income annuity pays a monthly income for a certain number of years.  The deferred accumulation contract accumulates so that the entire original deposit is available at the end of the income period.  The really good news is that the income is nearly all tax-free, and the income is paid for a short enough period that the process can be repeated and income can be adjusted for inflation.

Let’s look at a comparison. We put $100,000 into a Certificate of Deposit at 5.1% and take the interest monthly.  We will receive $425.00/month, all taxable.  In a 25% tax bracket, that will yield an after-tax income of $318.75, or 3.825%.  Now, we can put the same $100,000 into the combination annuity.  We will receive $451.42/month,   92.2% is tax-free, so our real rate of interest is5.31%!.  This comparison is based on a combination annuity with a 6 year guarantee. 

At the end of six years, our entire principal amount is in the accumulation annuity and is available to re-start the income process all over again. Rate on annuities vary, so shop just as you would for a competitive CD or money market account. We are happy to assist, contact us at anadolna@associatesgroupinc.com.