Annuities are popular retirement income solution for affluent investors, study says

The Bank of America study also provides valuable insights into estate planning and wealth transfer strategies for wealthy individuals. One key finding was that a significant portion of those surveyed (47%) are concerned about the impact of estate taxes on their assets. This highlights the importance of implementing effective estate planning strategies to minimize tax liabilities and preserve wealth for future generations.

The study also found that many wealthy individuals (39%) are interested in exploring trust structures as a means of managing their assets and facilitating wealth transfer. Trusts can offer various benefits, such as asset protection, tax efficiency and control over the distribution of assets to beneficiaries.

Additionally, the study revealed that a majority of wealthy individuals (58%) prefer to involve their children or other family members in the estate planning process. This suggests a desire for open communication and collaboration when it comes to preserving and transferring wealth within the family.

According to the study, annuities play an important role in the retirement plans of many wealthy individuals.

Because the study found that 38% of wealthy individuals are interested in guaranteed income solutions like annuities to provide a reliable source of retirement income, it suggests a growing demand among the wealthy for financial products that can mitigate longevity risk and provide peace of mind by guaranteeing income for life.

The study also found that annuities offer several benefits that appeal to wealthy individuals for retirement income planning. Those benefits include:

• Tax deferral on growth until withdrawals begin, allowing faster accumulation.
• No contribution limits like 401(k)s and IRAs, enabling higher savings.
• Ability to create a guaranteed "retirement paycheck" to cover essential expenses.
• Options like inflation protection and spousal benefits.

Also, annuities can provide diversification in their portfolio by guaranteeing a minimum level of income. This insulates them from having to sell risky assets at inopportune times to meet expenses. Meanwhile, the tax advantages of annuities, such as tax-deferred growth, make them attractive vehicles for wealthy individuals looking to maximize their retirement savings in a tax-efficient manner.

While annuities may not be necessary for the ultra-wealthy who have ample assets, the study suggests many affluent individuals – much like those of average means – value the guaranteed income stream, principal protection and tax benefits that annuities can provide as part of a comprehensive retirement plan.

The Bank of America study and other research have found several psychological benefits of having guaranteed income through annuities during retirement that include:

• Peace of mind and reduced stress. Having a guaranteed stream of income from annuities can provide retirees in all tax brackets with peace of mind and alleviate worries about outliving their savings or being impacted by market volatility. This can reduce stress levels and improve overall well-being.
• Greater retirement satisfaction and happiness. Studies analyzing data from the University of Michigan's Health and Retirement Study found that retirees with annuitized income report significantly higher levels of retirement satisfaction and happiness compared to those without guaranteed income sources. They are 43% more likely to consider themselves "very satisfied" in retirement.
• Lower risk of depression. The same studies showed that annuity holders are 39% less likely to report symptoms of depression compared to those without annuitized income. The guaranteed income likely contributes to improved mental health.
• Ability to take more investment risk. With a baseline of guaranteed income from annuities, retirees may feel more comfortable taking on additional investment risk with other assets to pursue greater growth potential.
• Reduced cognitive burden. Having predictable annuity income eliminates the need to actively manage investments and make complex financial decisions, which can be beneficial for those experiencing cognitive decline later in retirement.

The psychological benefits stem from the income security, longevity protection and reduced financial decision-making burden that annuities provide, allowing retirees to enjoy their golden years with greater peace of mind and life satisfaction.

Annuities tend to perform relatively well compared to other retirement options during market downturns and economic recessions for a few key reasons, according to the Bank of America study and other research. Those reasons include:

• A guaranteed income stream. Fixed annuities provide a guaranteed stream of income payments that are not impacted by market volatility or downturns. This income stability can be valuable during recessions when other investments may be losing value.
• Principal protection. Fixed and fixed index annuities are designed to protect the principal investment from any losses due to market declines. The account value will not decrease even during severe bear markets.
• Tax-deferred growth. Annuities allow tax-deferred growth of assets until withdrawals begin in retirement. This tax efficiency can help maximize growth during the accumulation phase before retirement.
• Diversification benefits. For affluent investors, annuities can provide a guaranteed baseline of income that complements and diversifies their overall portfolio. This insulates them from having to sell risky assets at inopportune times to meet expenses.

In contrast, during market downturns, stocks and equity investments typically suffer significant losses in bear markets. Bond portfolios may also lose value as interest rates rise during recessions, and retirement accounts like 401(k)s and IRAs are directly exposed to market volatility.

While annuities have tradeoffs like fees and lack of liquidity, their performance stability and guaranteed income features make them an attractive component of a well-diversified retirement portfolio, particularly for weathering the impacts of market downturns.

Experts say some of the most common pitfalls and mistakes to avoid when choosing an annuity for retirement include:

• Ignoring or underestimating the costs and fees associated with annuities. Annuities often have upfront commissions (up to 10%), annual fees, mortality charges and surrender penalties if cashed out early. These costs can significantly erode returns over time.
• Choosing the wrong type of annuity that doesn't align with your specific retirement needs and goals. For example, getting a variable annuity if you want guaranteed fixed income or an immediate annuity when you need access to the principal later.
• Taking excess withdrawals beyond the allowed amount with guaranteed lifetime withdrawal benefit annuities. This can permanently reduce or eliminate the guaranteed income value.
• Failing to name your spouse as the proper beneficiary on a joint-life annuity, which could deprive them of continuing full income payments after your death.
• Allocating too much of your retirement assets into an annuity, sacrificing liquidity and flexibility.
• Switching or exchanging an existing annuity with a valuable guaranteed minimum withdrawal or income benefit rider, which could cause you to forfeit that valuable guarantee.
• Purchasing an annuity from an insurer with a low credit rating, increasing the risk they may be unable to meet their future income obligations.
• Not considering the tax implications of annuity withdrawals compared to other income sources in retirement.

The 2024 Bank of America study provides valuable insights into retirement income planning and estate planning strategies. The study reveals a growing interest in guaranteed income solutions, such as annuities, to mitigate longevity risk and provide financial security in retirement. Wealthy individuals also recognize the importance of estate planning to minimize tax liabilities and facilitate smooth wealth transfer to future generations. Annuities offer several benefits that align with the needs and preferences of affluent investors, including guaranteed income, tax efficiency and portfolio diversification.

However, careful consideration must be given to the costs, fees and potential pitfalls associated with annuities. By working closely with financial professionals and adopting a comprehensive approach to retirement income planning and estate planning, individuals can effectively navigate the challenges and opportunities presented in the evolving financial landscape.