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  • Writer's pictureRetirement and Annuity Advisor Jennifer Lang

Retirees Pay More Taxes in Retirement Than Necessary | Annuity Strategies

Updated: Jan 24, 2021

At retirement, our growth investment plans, become income investment plans. If you've built up a large balance in 401(k)s, rollover IRAs and other tax-deferred accounts and have another source of income, such as a pension or even Social Security, RMDs can create a host of tax tribulations. Because the withdrawals are taxed as regular income, RMDs could push you into a higher tax bracket.

What happens when a growth plan becomes an income plan?

Split Annuity Strategy: Two Pools

There are some creative and potentially effective ways to take income from your retirement accounts. Here are some examples.

One approach uses two different annuity contracts to generate income and rebuild principal. Under this approach, let's say a retiree divides $400,000 between an immediate fixed annuity and a single-premium deferred annuity.

Assuming a hypothetical 3% return on the immediate annuity, a hypothetical 4% return on the deferred annuity, and a 10-year contract, the immediate annuity would generate a hypothetical $1,253 per month in income.

Over the same 10-year period, the deferred annuity would grow to $400,000— effectively replacing the principal.

A split annuity strategy can help you generate current income while pursuing a future income stream. Remember, the interest portion of the immediate fixed annuity is subject

to taxes. You also will have to pay taxes on the growth of the single-premium deferred annuity.


When preparing for retirement, one of the first questions you should ask yourself is,

“How much will it cost?”

The answer may depend on two main factors: How much you want to spend during retirement and how long you expect to live. While some are skilled at understanding spending, they may be less knowledgeable about how long they are expected to live.

A landmark study found that 43% of adults underestimate the average life expectancy by about five years. Put another way, most adults actually think they’re going to die younger than the statistics indicate.

The average person’s life expectancy at age 65 is 84.3 for men and 86.7 for women. And 25% of people who reach age 65 will live past age 90. A full 10% will live past age 95.

Have you estimated your life expectancy? Have you weighed your life expectancy against your total retirement assets?

Combination Strategy: Three Pools

Another somewhat more complex and aggressive strategy involves dividing your money into three pools.

The first pool is dedicated to income, the second to safety, and the third to growth.

This shifts most investment risk to the third pool. It also means the third pool has the greatest potential for growth. Retirees gradually spend down the first two relatively conservative pools, giving the third more time to grow.

In this hypothetical example, the first pool is invested in an immediate fixed annuity and would generate $2,150 per month in income during years 1 through 5.

The second pool is invested in conservative investments generating an average annual return of 4%. Its objective is to replace the original five-year immediate annuity.

During years 6 through 10, the second pool also would generate $2,150 per month in income.

At the same time, the third pool is invested for growth to take advantage of potentially higher returns.

Keep in mind that with the potential for higher returns comes an increased level of investment risk.

If the strategy is successful, the investment would rebuild the $400,000 principal, and the process could start over again.

In contrast to the split annuity strategy, this approach depends on relatively aggressive investment of the third pool to succeed.

When it comes to retirement living, there are many factors and considerations that need to be addressed. Here are some questions that arise as people prepare for retirement:

Anthony and Selena have a number of grown children and wonder: Are there ways to fund our retirement and still leave something for our children?

Dave and Christine ask: How can we make sure our perception matches reality?

Rebecca is a single woman with a small business. She wants to know: What steps do I take in order to review all my retirement assets?

Isaac likes to do research online. He asks: What type of investments can potentially generate income in retirement?

Answers will depend on each unique situation and can be addressed during a complimentary consultation.

There are a number of important steps we can take to help you assess your situation.

We specialize in helping people just like you develop and implement sound retirement strategies.

You should consider carefully whether aggressive investing fits with your tolerance for investment risk.

At we specialize in annuities and no-market risk retirement planning. We can help you put together a strategy and shop for the best annuity rates.

Ready to get started? Schedule a complimentary consultation today.


The guarantees of an annuity contract depend on the issuing company’s claims-paying ability. Annuities have contract limitations, fees, and charges, including account and administrative fees, underlying investment management fees, mortality and expense fees, and charges for optional benefits. Most annuities have surrender fees that are usually highest if you take out the money in the initial years of the annuity contact. Withdrawals and income payments are taxed as ordinary income. If a withdrawal is made prior to age 59½, a 10% federal income tax penalty may apply (unless an exception applies).

Annuities are not guaranteed by the FDIC or any other government agency. This is a hypothetical example used for illustrative purposes only. It is not representative of any specific investment or combination of investments. Past performance does not guarantee future results. Actual results will vary.

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