Annuities for the Upper Class American
Annuities offer many benefits for the upper class American retirement saver. From tax-deferred growth to guaranteed income for life, annuities offer several advantages as part of an upper class American’s portfolio. Even upper class entrepreneurs and business owners who have access to a defined benefit plan might find that the benefits of an annuity often outweigh other retirement savings selections such as equities, bonds, ETFs and CDs.
Annuities purchased with tax qualified-money as part of an approved defined contribution retirement savings plan grow tax-deferred until the annuitant begins taking payouts. For most annuitants, even upper class Americans, payouts can begin no earlier than age 59 ½ and no later than 70 ½. The earlier the investor begins saving, the more the investment will have accumulated at retirement.
Variable annuities in particular offer excellent long-term growth potential for upper class retirement investors. When buying a variable income annuity, an investor can usually choose among myriad funds in which to invest the premiums. The insurance company invests the premiums in funds ranging from very aggressive to very conservative. Funds should always be chosen with the investor’s risk tolerance in mind. He or she should also consider the diversity of other investments before choosing funds. Upper class annuity investors can also usually choose among several different domestic and foreign funds. Whether an investor’s tolerance for risk is high or low, he or she will usually find several suitable options in which to invest premiums.
As most upper class American annuity investors know, pre-tax retirement savings grow much faster than post-tax savings because more of what is earned remains in the account and is compounded over time. When money is left in the account and not taken out to pay tax, the account can often grow much larger in a reduced period of time. For upper class American investors with a long time until retirement, for example those in their late forties or early fifties with significant assets, the difference can be quite significant by the time monthly payouts begin several years later.
Investors who have already contributed the maximum amount to a retirement savings plan like as a 401k, Roth IRA, SEP IRA or other valid account, can invest post-tax dollars in a deferred annuity. This kind of annuity will also grow tax-deferred until the upper class American investor begins to take payouts. And, for high net worth upper class Americans and those with very high annual incomes, there is currently no limit on the amount of money that can be used to purchase a deferred annuity. There is also no limit on the number of deferred annuities an investor can own.
Guaranteed Lifetime Income from Annuities
Once an upper class investor requests that the insurance company begin the payouts, he or she will begin receiving income. While most upper class American investors choose to receive the income in monthly installments, payouts can be received quarterly or annually.
While there are many benefits to annuities, there are also risks involved with annuity investing. In order to reduce the risks of annuity investing, all investors are advised to understand the following points.
AM Best, Moody’s Investors Services and Standard and Poor’s are the three insurance and annuity company ratings agencies. Each issues a credit rating based on the annuity company’s ability to meet both current and future obligations to policyholders. Financial obligations range from paying death benefits on all term and permanent life insurance policies to sending the monthly payouts on all annuities. The highest ratings available are “A++” issued by AM Best, “Aaa” issued by Moody’s and “AAA” issued by Standard and Poor’s. The long-term financial obligation of an annuity can be for as long as 25 years or more. Buying an annuity from a company with the highest possible rating is well advised.
An annuity represents a contract. In exchange for buying the annuity from the insurance company, the upper class investor receives a guaranteed amount of money in the future as defined by the contract. Unlike other retirement investments for upper class Americans, the money used to purchase an annuity is never liquid. Neither a deferred nor an immediate annuity can be sold at a later time. An annuity investor must make sure he or she has enough cash in other investments to ensure money in an extreme emergency.
Money used to purchase variable and indexed annuities is invested in stocks, bonds and money market funds. Upper class annuity investors near to or at retirement age may consider fixed annuities instead of variable or indexed annuities. But because inflation can reduce an upper class investor’s nest egg and result in the loss of purchasing power, it is imperative to have some assets in growth investments.
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Fixed and Indexed Annuities
For upper class investors who are risk-averse, the benefits of annuities will probably outweigh the risks. Fixed annuities provide a set amount of income each month that remains level, regardless of what happens in the stock market. Even if the Dow Jones Industrial Average or the Standard and Poor’s 500 drop significantly, the amount of money paid out to the fixed annuity investor remains the same. The amount of money sent each month is guaranteed. Fixed annuities are particularly well suited for upper class Americans who need income yet want to leave their other assets to family or charity.
Upper class American investors with 10 years or more before they want to begin taking annuity payouts might consider indexed annuities. The longer time horizon often results in a smoothing of volatility. As mentioned earlier, inflation will reduce the purchasing power of the monthly payment. Therefore, a certain amount of growth must be maintained. Many insurance companies also offer a point, below which an annuity investment will not fall. The payouts for this type of contract may be less than for others, but this type of annuity might provide more peace-of-mind for risk-averse investors.
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