Increasing Your Current Income with the Same Principal

By: James M. Rankin, Author of Income Engineering

Millions of retirees rely on interest income from Certificates of Deposit
at local banks or credit unions. CD yields, however, swing wildly over time,
which can leave fixed‑income retirees exposed. In 1985, a $100,000 one‑year CD
produced roughly $11,000 in interest; by 2010 that same principal earned about
$500; this year it would generate around $4,500.

One‑Year CD Rates Every Five Years (40‑Year
View)

Below is an illustrative snapshot of average one‑year CD yields every
five years from 1985 through 2025, rounded to show the long‑term trend:

• 1985: 11.0%
• 1990: 8.0%
• 1995: 5.5%
• 2000: 6.5%
• 2005: 3.5%
• 2010: 0.5%
• 2015: 0.3%
• 2020: 0.2%
• 2025: 4.5%

Timing matters: locking a large lump sum into a one‑year CD during a low‑rate
environment can dramatically reduce expected income compared with higher‑rate
eras.

A Practical Alternative: Split
Annuities

When CD yields are depressed, a split annuity strategy can be an
effective alternative. Splitting a lump sum between two annuity products lets
retirees buy immediate guaranteed income while also locking in a higher multi‑year
fixed rate for future growth.

Scenario: A client has $205,000. He uses $82,000 to purchase a single‑premium
immediate annuity to generate predictable income right away and places the
remaining $123,000 into a ten‑year fixed annuity paying 5% to accumulate for
later use. This split trades some liquidity for two clear benefits: a
dependable paycheck now and a growing principle that can be annuitized,
withdrawn, or left to heirs later.

Why this works

• Income now: The
  immediate annuity addresses short‑term cash flow needs and discourages
  tapping principal in other safe accounts.
• Rate
  diversification: The 10‑year fixed annuity locks in a nominal 5% return on
  a portion of the portfolio, protecting that slice from short‑term rate
  swings and preserving the option to buy another annuity later, often at
  higher payout rates as the client ages.
• Optionality:
  The accumulated balance after ten years can be annuitized for higher
  lifetime income, used for systematic withdrawals, or preserved for
  beneficiaries.

Key Tradeoffs and Practical Steps

• Liquidity:
  Immediate annuities are generally illiquid beyond their periodic payments;
  fixed annuities commonly carry surrender charges during early years.
  Maintain an emergency fund outside annuity contracts.
• Inflation:
  Fixed nominal payouts lose purchasing power. Consider whether part of your
  portfolio should retain inflation protection.
• Taxes: Annuity
  earnings are taxed as ordinary income when distributed; immediate annuity
  payments often include a nontaxable return of principal component
  depending on the payout method. Consult a tax professional.
• Insurer credit:
  Guarantees hinge on the issuing company’s financial strength and state
  guaranty limits—shop for well‑rated carriers.

In my example, splitting $205,000 into an $82,000 immediate annuity and a
$123,000 ten‑year fixed annuity can boost the near‑term income while building a
larger principal equal to the original principal for stronger future payouts.

When you utilize this pragmatic balance between higher income today and
flexibility for tomorrow, a split annuity is worth discussing with a trusted
income engineering specialist.