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A problem that many individuals face today is how to get cash flow out of their investments while also growing their money for the long term. Putting an entire portfolio into yield oriented investments doesn’t provide the best opportunity for long term growth, in most instances. So how do you find a happy medium? In this week’s Mullooly Asset Management podcast, Tom and Brendan have an idea to share with investors who find themselves in this situation. It might not be perfect for everybody, but it is certainly something to consider.
If you’ve listening to the podcast before or read our content, you probably know that we aren’t big annuity fans here at Mullooly Asset Management. That’s why it may be a bit surprising to hear this income producing and long term growth concept actually comes from something called a split-funded annuity. Tom learned about these in his days as a broker in the 1980s.
A split-funded annuity has a decent concept that (when tweaked to our liking) could provide a solution for investors seeking income now, who also desire long term growth. A split-funded annuity is actually two annuities, not one. The first is an immediate annuity that provides income right away. The second one is where the long term growth is supposed to occur.
Investopedia actually does a pretty good job of explaining split-funded annuities, so to read more about them check out this link: (http://www.investopedia.com/terms/s/split_funded_annuity.asp)
The concept that Tom has proposed as a potential solution is similar to a split-funded annuity (minus the annuity part). If a client needs income from their portfolio, we identify their financial needs on a monthly basis. We take that number and create a yearly total. That total can be adjusted to reflect the number of years a client requires income for. The total is taken in lump sum and set aside, only to be used for the monthly distribution the client desires. So that takes care of the need for immediate income.
The rest of the portfolio is designated for long term growth. By not narrowing the focus to yield oriented investments only, it opens up investment options that may produce the type of long term growth investors want.
The main goal of this split-funded annuity concept is that after a few years of distributions, we will hopefully be peeling money off the growth side of the portfolio to repeat the process again. Clients continue to get their monthly income and see long term growth results, thus prolonging their assets.
This concept is definitely not for everybody, but it is something to consider and discuss with your investment advisor.
Tune into this week’s Mullooly Asset Management podcast and hear the discussion about this income and growth producing strategy.