Investing is a wise choice for most anyone at any income level. However, those who earn a substantial income have more flexibility with their investment options. Those same high income earners also face unique challenges in their investment planning that can make many of the most common options, such as 401(k) accounts, less than ideal or even unavailable entirely.
For that reason, high earners will often use annuities to leverage their income with fewer restrictions and include the ability to provide for a beneficiary if necessary. If you are a high income earner, here is how you can utilize annuities to boost your portfolio.
The Challenges Unique to High Income Earners
Many people assume that high income earners can have their choice when it comes to investing for retirement. In reality, they may find that their retirement options are severely limited; for example, the income cap for a 401(k) is $305,000 as of 2023. After this point, employers can no longer provide any matching to the 401(k), and the employee must still abide by the yearly contribution limit set by the IRS.
Similarly, those with a modified adjusted gross income in excess of $153,000 in 2023 can not contribute to a Roth IRA at all. This means that many standard retirement options are off the table for high income earners, and they will need to look elsewhere to fund their post-work lives.
Of course, many will choose to invest their money in mutual funds and index funds, but this option exposes the portfolio to market risk. This may not align with the risk tolerance and long-term goals of some individuals.
In addition, high income earners are also faced with the desire to keep up their general lifestyle in retirement—which means they will require more investments and strategies in order to continue the desired stream of income once they retire. With that higher baseline income in retirement, they will also be placed into higher tax brackets.
Why Annuities Can Solve These Problems
In order to bolster their portfolio and achieve their goals, many high income earners are turning to annuities to solve their problems. Annuities are often funded via a lump sum, after which they pay out a monthly installment which is similar to a replacement paycheck. Annuities create a powerful potential for high earners, including:
- Protection from the market: Many types of annuities (including MYGAs) do not fluctuate based on market changes, which can help high earners to balance their portfolio against market downturns.
- Tax deferment: Annuities function differently than other types of investments such as CDs and stocks. Instead of paying taxes on the accumulation each year, annuities only create a taxable event when the accumulation is withdrawn. This is why annuities are considered to be tax advantaged; they continue to grow untaxed more effectively than other options.
- Longevity: Annuities are available in a variety of term lengths, and you can even select options that pay out until you die. This provides a level of financial security that is important in retirement, especially for those who retire early.
- Laddering: Even if you have previously funded retirement vehicles, including a 401(k), you cannot access that money without penalty (in most scenarios) before you reach a certain age. For high income earners who are poised to retire early, bridging the gap between now and the start time allowed for access to retirement funds can be tricky. Annuities can be laddered so that they mature in sequence, providing reliable income each year in a cycle.
- Beneficiary flexibility: Annuities are easy to establish with riders that allow your money to be given to a named beneficiary when you die. The beneficiary of an annuity could also continue to receive payments for the duration of their lives too, depending on how the annuity is set up.
Risks to Be Aware Of
Annuities are a powerful choice for high income earners, but they still have a few caveats. Be aware that:
- You cannot easily remove money from an annuity once you put it in
- Annuities without an inflation rider can have less purchasing power over time
- You may need to pay surrender charges if you want the annuity money back sooner than the term
- Not all annuities are shielded from market risk; read the details of variable rate annuities and indexed annuities specifically
Choose the Annuities That Suit Your Financial Picture
If you are a high income earner and are considering how to leverage annuities to fund your retirement, and provide for a beneficiary, the best place to start is by learning more about the types of annuities available and their rates.
Pillar Life Insurance offers an online portal allowing you to purchase the annuities that are right for you without the requirement to speak to an agent. Take a look at our online offerings to learn more about annuities and how they may fit into your overall financial plan.