Annuities For High-Net-Worth Individuals: Strategies & Tips (2024)

How Annuities Can Fit Into Your Portfolio

Your overall wealth along with how much money you are looking to invest will help determine if an annuity makes sense as part of your portfolio.

Annuities are often used as a safe and effective way to guarantee income in retirement. For this reason, they may not make sense as part of a strategy for the ultra-wealthy (think those with net worths in the tens of millions or higher).

“The very wealthy probably don’t need annuities,” Rob Williams, managing director at the Schwab Center for Financial Research, told Annuity.org. “They may have enough money just to support their retirement without needing to buy annuities. Annuities are a form of insurance.”

But for high-net-worth individuals, there are plenty of ways that buying an annuity can fit soundly and efficiently into your portfolio.

For individuals with assets well over $500k, you will have better flexibility in structuring for retirement.

It may not be necessary for you to focus only on income planning. Once you retire and the paychecks cease, there may not be as large of an income gap as with middle-class investors, or those who have saved $50k to $350k to fund their retirement lifestyle.

How Annuities Can Benefit High Net Worth Individuals

• Diversification
• Tax advantages
• Inflation protection
• Legacy

Annuities are just as viable for high-net-worth individuals as they are for the average consumer. They provide protection, peace of mind and a guaranteed income, which is valuable regardless of your net worth. This is especially true for individuals with significant wealth tied up in private or very risky ventures. Creating a minimum level of income insulates a retiree from needing to take withdrawals at an inopportune time.

Stephen Kates, CFP®Principal Financial Analyst for Annuity.org

See Also

Whether to Pick a Dividend Stock or AnnuityHow Much Money Can I Get Each Month From A $100,000 Annuity?How Much Cash Can I Expect Each Month From A $150,000 Annuity?

Stephen Kates, CFP® is a personal finance expert specializing in financial planning and education. He serves as the Principal Financial Analyst for Annuity.org, where he delves into industry trends to support consumers and financial advisors on wealth management, annuities, retirement planning, and investing.

Diversifying Your Portfolio

High-net-worth individuals are often well-versed in the importance of having a strong and diversified portfolio.

“A diversified portfolio has historically been the best hedge against inflation and provides the best opportunity to have your savings, as well as your income, keep pace with or exceed inflation,” Williams said.

Buying an annuity is one effective way to help further that diversification. Annuities are not investments themselves but are actually insurance products, which require you to hand over money that can eventually be converted into guaranteed payments.

This built-in safety — while still maintaining the ability to grow in value — can add some much-welcomed security to your portfolio while still providing predictable income.

Annuities can also help combat inflation by creating streams of guaranteed income set to begin later in life. If you buy multiple annuities and ladder them, you can create a system where you receive more and more payments as you age and inflation grows.

Williams pointed specifically to the idea of marrying an annuity with an existing portfolio to best combine the benefits of your different investments and what each tool does best.

On top of diversification, annuities can also serve to simplify your portfolio later in life. As you grow older, you may tire of having to manage a full-on portfolio and all its features. Converting those assets into an immediate annuity where you receive payments right away can almost function as if you are buying a pension, giving you access to indefinite, guaranteed income that requires no management.

Another factor to consider is your monthly budgeting needs. Just because an individual has been successful in accumulating a large asset base, does not guarantee that they are living within their means. Unfortunately, it is not uncommon for individuals who earn $250 thousand a year to spend all that they earn.

In other words, even wealthy folks may need structured income planning, establishing monthly income streams that the individual or their spouse cannot outlive.

If you want monthly guaranteed lifetime income streams, it is worth looking at a flexible income rider, which is part of certain fixed index annuities. You can also consider, if potentially suitable, a single premium immediate annuity (SPIA).

The Tax Advantages of Annuities

Part of building a strong portfolio is finding the best ways to make taxes work in your favor. Annuities help tremendously.

Many types of annuities have great tax features that are beneficial to high-net-worth individuals. According to the Insurance Information Institute, if you purchase a deferred annuity, then your taxes will be deferred until you begin making withdrawals.

This includes interest earned on the annuity, making it an effective savings vehicle that can grow without being limited by taxes.

High-net-worth individuals can also employ annuities to circumvent a common limit on their savings: contribution caps.

Common retirement plans such as 401(k)s and IRAs are subject to contribution limits, meaning, you can only contribute a certain amount to your plan in a given year.

Annuities, on the other hand, do not have to abide by these caps. If you are already maxing out your traditional retirement plan savings, then an annuity can be used to help you put even more away.

Adding Safety and Principal Protection to Your Portfolio

Your portfolio may already contain a significant amount of risk, which is often necessary to grow your investments.

That’s why a major appeal of annuities to high-net-worth individuals is their perceived safety. While there is always some level of risk associated with annuities, the primary concerns are liquidity risk, where the money is inaccessible, or inflation risk, where inflation outpaces annuity growth. Annuities, however, are protected from market risk. Overall, annuities tend to be a much more secure option than some other forms of investments.

What Makes Annuities So Safe?

• Your principal investment is protected.
• Annuities result in guaranteed payments.

This is the case for a couple of different reasons. First off, your principal investment is generally protected when you buy an annuity. Unlike other traditional investments, you don’t have to worry about losing all the money you placed into the product.

Additionally, annuities result in guaranteed payments that can last for the rest of your life. Depending on the type of annuity you have, those payments may fluctuate based on the performance of investments.

But you are always guaranteed to get something and can rest easy knowing those payments will never end.

If you are uncomfortable with at-risk investments, or would at least like to remove some of the risk from your overall financial holdings, annuities are worth exploring. These products have protected growth indexes, where a person’s funds are not directly invested in an index, such as the S&P 500. Instead, the annuity contribution is mapped to a selected index and the insurance carrier issuing the annuity will look at the annual performance of the index to calculate how much interest to credit to the annuity.

When the index or indexes are positive, you will have a gain in the contract. However, when the stock market is negative, there will be no decline in either the principal of the annuity or in previously earned gains. At annuity inception, as well as at every annual review, a fiduciary financial advisor can assist you in selecting the best index or indexes for the upcoming year.

While it is true that you will not lose funds in this annuity type, that does not mean you should not strive to earn as much interest every year as possible. In a properly selected income rider, there will be no charge to the individual for changing indexes, or for receiving ongoing assistance.

There is a drawback to achieving this security that high-net-worth individuals should be aware of, and it is that annuities tend to be illiquid products.

It can be difficult to get your money out of an annuity if you change your mind down the road, and you may be subject to surrender fees.

Leaving a Legacy For Your Beneficiaries

High-net-worth individuals can use annuities to help leave a strong legacy for their beneficiaries. This can be accomplished in a few different ways, and there are a couple reasons why annuities are particularly effective at this.

When you purchase an annuity, you can set it up with a death benefit rider, allowing it to pass to your named beneficiary after you die. For those worried about the illiquidity that comes with purchasing an annuity, it can help to know that the remaining value of the contract will not be lost when you die.

One reason that annuities are strong vehicles for providing for your beneficiaries is that they are often not subject to probate. Circumventing this step allows the annuity to pass straight to your beneficiary without any hassle.

High-net-worth individuals also do not have to be the center of an annuity they purchase. You can buy an annuity directly for your child, setting it up so that they eventually receive those payments.

Creating an annuity for your child can help give them a leg up in life with regular guaranteed payments while also removing the risk of them quickly burning through a lump sum.