Strategic Uses of Annuities for High-Net Worth and Mass Affluent Households

Annuities are a financial product used by a broad range of individuals, including a majority of middle-class households with annual incomes under $100,000 as well as high-net worth individuals seeking income guarantees and market volatility protection in retirement. A typical annuity arrangement involves exchanging a lump sum or periodic payments to an insurer in return for guaranteed income streams, often described as self-funded pensions.

For high-net worth clients, annuities offer additional advantages such as tax-deferred growth without annual IRS contribution limits, asset protection, and stable income for surviving spouses or heirs. Nonqualified annuities, purchased outside traditional tax-advantaged plans like 401(k)s and IRAs, allow for considerable tax-deferred growth and large contribution limits, although withdrawals are taxed as ordinary income and may incur early withdrawal penalties. Multi-year guaranteed annuities (MYGAs) offer fixed returns with tax deferral, functioning similarly to certificates of deposit, while variable and indexed annuities provide market-linked growth with associated risks and fees. Joint life annuities support surviving spouses with guaranteed income, providing continuity beyond lump-sum life insurance payouts. Asset protection is a key feature in some states, such as Florida, Texas, and New York, where annuities enjoy creditor protection under state statutes, making them valuable components of broader asset protection strategies especially for professionals exposed to high legal risks. Annuities also facilitate generational wealth transfer by enabling long-term income streams for children or grandchildren, offering a lower-maintenance and potentially more cost-effective alternative to trusts. Recent tax law changes, particularly the 2019 Secure Act, restricted the stretch IRA strategy for non-spousal beneficiaries, but nonqualified annuities still permit extended distributions over the beneficiary's lifetime, mitigating tax liabilities.

Despite their benefits, annuities are less suitable for ultra-high net worth individuals who may self-insure or for low-income households due to minimum investment requirements, penalties, and lack of liquidity. Mass affluent households, with assets between $100,000 and $500,000, often find annuities align well with their goals of income security, tax management, and portfolio diversification. Ultimately, annuities represent a specialized tool within a diversified financial strategy, requiring alignment with individual goals, risk tolerance, and liquidity preferences rather than solely net worth measures. This nuanced approach underscores the importance of professional financial advice to optimize the role of annuities in retirement and wealth planning.