Annuities are a popular investment option for those looking to secure a steady income in retirement. However, with so many different types of annuities, it cannot be easy to know which one is right for you. One option to consider is a split-annuity strategy. In this guide, we will explore a split-annuity strategy, how it works, and the benefits and drawbacks of this investment option.
What is a Split Annuity Strategy?
A split-annuity strategy is a type of annuity that allows you to divide your investment between two different annuity products. This strategy can help you balance growth and income, depending on your investment goals and risk tolerance.
One of the annuities in a split-annuity strategy is usually a fixed annuity, which provides a guaranteed rate of return. The other annuity is usually a variable, which offers the potential for higher returns but also comes with higher risk. The idea behind the split-annuity strategy is that the fixed annuity provides a stable base of income, while the variable annuity offers growth potential.
How Does a Split Annuity Strategy Work?
A split-annuity strategy, also known as “annuity laddering,” works by dividing your investment between two different annuity products. The amount you allocate to each annuity will depend on your investment goals and risk tolerance. For example, if you are risk-averse and prioritize income, you may allocate a more significant portion of your investment to the fixed annuity. On the other hand, if you are looking for growth, you may allocate a more significant portion of your investment to the variable annuity.
It is important to note that a split-annuity strategy’s performance will depend on the underlying annuity products’ performance. If the variable annuity performs well, you may see higher returns. However, if the variable annuity performs poorly, you may experience losses.
Why Would I Want A Split Annuity?
There are a few reasons you might want an annuity ladder in retirement.
- First, it can provide you with a steadier stream of income. If you have a pension and Social Security, you may consider adding a split annuity to your portfolio. This type of annuity can give you the security of knowing that you have two different sources of income coming in each month.
- Second, a split annuity can help you diversify your income sources. You can receive payments from a fixed annuity and a variable annuity with a split annuity. It can help you protect your retirement income from fluctuations in the stock market.
- Third, a split annuity can provide flexibility in how you receive your payments. With a split annuity, you can receive payments from one source or the other or a combination of both. This can be a great way to customize your income in retirement.
Benefits of a Split Annuity Strategy
- Diversification: A split-annuity strategy allows you to diversify your investment portfolio, reducing the risk of having all your eggs in one basket.
- Balance of income and growth: By dividing your investment between a fixed annuity and a variable annuity, you can achieve a balance between income and growth, depending on your investment goals and risk tolerance.
- Guaranteed income: A split-annuity strategy’s fixed component provides a guaranteed rate of return, which can provide a stable base of income in retirement.
Drawbacks of a Split Annuity Strategy
- Complexity: A split-annuity strategy can be complex, making it difficult to understand and manage.
- Higher fees: The fees associated with annuities can be higher than other investment options, reducing your returns.
- Dependence on performance: The performance of a split-annuity strategy will depend on the performance of the underlying annuity products. If the variable annuity performs poorly, you may experience losses.
Next Steps
A split-annuity strategy can be helpful for those looking to balance income and retirement growth. However, it is essential to understand this strategy’s benefits and drawbacks before deciding whether it is right for you. Then, considering your investment goals, risk tolerance, and financial situation, you can decide whether a split-annuity strategy makes sense. As with any investment decision, we recommend consulting with a financial advisor to ensure that you make the best decision for your unique circumstances. Contact us today for a quote on annuities.
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