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What’s so special about annuities and why do the top 1% in this country love them so much?

This particular retirement strategy tends to be criticized by some because of the high expenses involved. But many 1%-ers have found the benefits of this savings tool far outweigh the cost.

The basic definition of an annuity is an insurance product that pays out a steady income stream in retirement. It’s meant to be used as one part of a strategic plan for your golden years that can be mapped out with a professional.

Here’s how an annuity works: you make an investment in the annuity, and it then makes payments to you on a future date or series of dates. You can decide if your annuity payments will come monthly, quarterly, annually or even in a lump sum.

Let’s take a look at some the top reasons why high net worth individuals flock to annuities, and why you possibly should too:

1. Less risk

Annuities are known as guaranteed transfer-of-risk products, and many people enjoy taking advantage of at least some investment vehicles that keep their assets out of danger.

Because annuities technically aren’t in the investment category, you won’t be earning a lot of extra money on them, but you won’t be losing it, either. It’s simply a good retirement savings option.

High net worth individuals typically already have enough risk in their lives in terms of their jobs and other investments, so they view annuities as a way to take risk off the table.

2. Shield from creditors and predators

In some states like Florida and Texas, annuities are fully protected from creditors and frivolous lawsuits. This can mean a lot to 1%-ers, since they are often preyed upon by money-hungry companies and individuals. Fixed annuities, where one opts for a guaranteed payout of their money, are the only product out there that offer such protective promises.

3. Less taxes

It’s true: high net worth individuals pay a lot more in taxes than the rest of the population. But annuities can help with that.

Tax deferral and exclusion ratios on annuity payouts are two strategies to help 1%-ers lower their tax exposure. Fixed deferred annuities can guarantee an annual percentage yield with as short as a three-year surrender period. Talk with a financial professional about which annuity strategy could be the most effective for your particular situation.

4. Interest rates not an issue

High net worth individuals are much more focused on the contractual transfer-of-risk guarantee that annuities offer, rather than its interest rates. For that reason, they don’t fret over trying to perfectly plan their annuity purchase with ever-fluctuating interest levels. Their simple approach to investing in annuities usually pays dividends that outweigh whether or not they secured an optimal interest rate.

5. Estate planning possibilities

While annuities can’t be transferred tax-free to to beneficiaries like life insurance, they do efficiently pass outside of probate. As you probably know, probate is the process a legal court takes to conclude all your legal and financial matters after your death. Since it can be a lengthy and expensive affair, the fact annuities are free from it is a really great thing.

Many 1%-ers use contractually guaranteed legacy strategies as a way to include annuities within their estate plan. Talk to a financial professional about whether this could be the right choice for you.

Bottom line

While not everyone falls into the 1% category, it’s still valuable to be educated on how and why these individuals purchase annuities. If you decide to go this route, make a transfer-to-risk decision based only on the contractual guarantees and place your money only with carriers you trust. And above all, consult a professional before you leap.

Author Ron L. Brown, CFP®

Ron is a CERTIFIED FINANCIAL PLANNER™ and President of R.L. Brown Wealth Management. He specializes in retirement, estate, and business planning for professionals and entrepreneurs. Ron assists his clients with creating a financial plan to ensure they are able to live their ideal lifestyle during retirement and leave a strong legacy for their family. Ron has been featured in The Wall Street Journal, US News, Yahoo Finance, Investopedia, and numerous other high profile financial publications.

More posts by Ron L. Brown, CFP®
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