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A split-funded annuity is a retirement planning strategy in which you divide a lump sum between two types of annuities purchased simultaneously: an immediate annuity that starts paying income right away, and a deferred annuity that accumulates tax-deferred growth over the same period. The income from the immediate annuity provides cash flow now. The deferred annuity grows untouched and is designed to restore your original lump sum by the time the immediate annuity payments end.
Think of it like splitting your principal into a spending account and a rebuilding account, running both at the same time so you end the period with the same capital you started with.
The split is calculated so the deferred annuity's projected value at the end of the income period equals the original total investment. If you invest $200,000 total and receive income for ten years from the immediate portion, the deferred annuity should grow to approximately $200,000 by year ten.
The split between the two accounts depends on the immediate annuity payout rate and the assumed growth rate inside the deferred annuity. A higher assumed growth rate in the deferred account lets you allocate more to the immediate annuity, generating higher near-term income. Lower growth assumptions require a larger allocation to the deferred side to hit the principal replacement target.
The split-funded structure addresses a common psychological barrier in retirement: reluctance to spend principal. Many retirees hold back on spending because they worry about depleting their savings. The split-funded annuity reframes that concern.
The strategy depends entirely on the deferred annuity achieving its assumed growth rate. If actual returns fall short of projections, the deferred account will not fully restore the original investment by the target date. You end the income period with less capital than you started with.
Surrender charges are another consideration. Most deferred annuities impose surrender penalties for early withdrawals, typically lasting seven to ten years. You should only commit funds to the deferred account that you genuinely do not need access to during that period.
Split-funded annuities are most appropriate for retirees or pre-retirees who need predictable income from a specific pool of assets and want to protect the nominal value of their capital over a defined time horizon. They work best when the deferred annuity's guaranteed minimum crediting rate is known and sufficient to reach the principal replacement target without relying on optimistic market projections.
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