The “Really” Split Annuity

The average money market fund and one-year CD are earning less than the rate of inflation.  U.S. Treasury bills’ yields are the lowest they have been in almost four decades. You want your investments to outpace inflation and taxation, but maybe you’re worried about putting your funds into stocks right now. So how can you avoid being too conservative without risking your money in volatile investments?  Many fixed annuities are paying a higher yield than CDs and Treasuries. Their earnings are tax-deferred, and you can select from a number of payout options. However, even these rates are at historic lows and don’t give you any upside potential for a recovering economy. Another thought would be to put your money into a variable annuity that has stock-based sub-accounts. When the stock market recovers, your accounts might possibly grow as well. The problem is: Who knows when that will happen?  An alternative may be to combine the fixed and variable investments. This concept would give you the safety of a fixed rate of return for a specified time along with the chance to earn more money when the market performs well. If the market does not turn around, you won’t lose big because you will receive a minimum rate of return.  A hypothetical case might look like this: A fixed annuity with a 4% yield for five years could be combined with a variable annuity that participates in 65% of the S&P 500 Index’s growth and promises to pay 1.8% minimum per year. If you were to split your investment with 2/3 into the fixed annuity and 1/3 into the variable annuity, the worst return you could expect would be 3.27%. The upside potential is whatever the stock market does, which historically has averaged 9.34% over the past 10 years^.If you have found yourself watching the interest rates on your investments drop but you’re afraid that you could lose money with stocks, the combination of a fixed annuity and a variable annuity might deserve some consideration.