Split Annuity Strategy
Market volatility often pushes investors to look for retirement income options that offer more predictability than the stock market. A split annuity strategy is one such approach — it combines two annuities to generate steady income while working to restore your original principal over time.
Quick answer: A split annuity strategy divides a lump sum between an immediate annuity (for income) and a deferred annuity (for growth), so that by the end of the term, you’ve received regular payments and your principal has been rebuilt.
Why Consider a Split Annuity Retirement Strategy?
Market downturns can be unsettling for retirees and pre-retirees who rely on their portfolios for income. For example:
In the first quarter of 2020, the S&P 500 lost nearly 20% of its value — roughly $5.6 trillion — due to market volatility.
For investors who want to step off the market’s ups and downs, an annuity income strategy can offer more stability, since annuities are insurance contracts designed specifically for retirement purposes rather than market-tracking investments.
What Is an Annuity?
An annuity is a contract between you and an insurance company. Here’s how it works:
You fund it with either a lump sum or through regular payments.
In exchange, the insurer agrees to make payments back to you — either immediately or at a future date.
Money inside the contract grows on a tax-deferred basis.
Unlike IRAs or 401(k)s, annuities have no contribution limits.
This flexibility is part of why annuities can be structured creatively — including as part of a split strategy.
How the Split Annuity Strategy Works
A split annuity retirement strategy uses two annuities purchased at the same time:
1. A fixed-period immediate annuity – begins paying you income right away for a set number of years.
2. A single-premium tax-deferred annuity – grows quietly in the background, with no withdrawals during the term.
The capital is divided between the two in a way that’s designed to:
Provide tax-advantaged income for a set period, and
Restore your original principal by the end of that period, through the growth of the deferred annuity.
Important: Any withdrawals taken from the deferred annuity are taxed as ordinary income. Once the immediate annuity’s term ends, the strategy can be repeated using the now-restored funds from the deferred annuity — creating a renewable income cycle.
Example: How a Split Annuity Retirement Strategy Plays Out
Consider a hypothetical retiree, Diane, who splits $300,000 between two annuities:
| Annuity Type | Amount Invested | Term | Hypothetical Return |
|---|---|---|---|
| Deferred Annuity | $182,148 | 10 years | 5% |
| Immediate Annuity | $117,852 | 10 years | 3% |
Results over 10 years:
The immediate annuity is projected to generate about $1,138 per month in income.
The deferred annuity is projected to grow back to $300,000 — replacing Diane’s original principal in full.
(This example is hypothetical and for illustrative purposes only. Actual results will vary based on the annuity contract, insurer, and market conditions.)
Fixed vs. Deferred Annuities
Both fixed and deferred annuities can play a role in a split strategy, but they serve different purposes:
A fixed (immediate) annuity starts paying out income right away for a defined period.
A tax-deferred annuity grows over time without taxation until funds are withdrawn, making it useful for rebuilding principal.
Important Considerations Before Choosing an Annuity Strategy
Annuities can offer stability, but they also come with contract limitations, fees, and tax rules to understand before committing funds:
Fees may include: account and administrative fees, investment management fees, mortality and expense charges, and fees for optional benefits.
Surrender charges typically apply and are usually highest in the early years of the contract.
Withdrawals and income payments are taxed as ordinary income.
Early withdrawal penalty: Withdrawals made before age 59½ may be subject to a 10% federal tax penalty (unless an exception applies).
Not government-insured: Annuities are not guaranteed by the FDIC or any other government agency.
Variable annuities carry investment risk — the return and principal value fluctuate with the market and are not guaranteed. Variable annuities are sold by prospectus, which should be read carefully before investing, as it details investment objectives, risks, charges, and expenses.
Is a Split Annuity Strategy Right for You?
Every retirement plan is different, and a split annuity retirement strategy won’t be the right fit for everyone. If you’re a Florida retiree exploring annuity retirement income options — or simply want to understand how an annuity strategy for retirement could fit alongside your other assets — it’s worth reviewing your full financial picture with a professional before moving forward.
Tyler Harrelson, CLTC®, CES®, CFS®, and the team at The Art and Science of Successful Planning (ASOFSP) in Fort Myers, Florida, work with individuals and families across Florida to evaluate whether strategies like this align with their broader retirement goals.
Guarantees associated with annuity contracts are backed by the claims-paying ability of the issuing insurance company.
