This article is reprinted with permission from Esq. Wealth Management, Inc.
When the markets get jittery, smart money often looks for shelter—not in the form of burying cash under the mattress, but in shifting strategy toward assets that can grow quietly and predictably, without the gut-wrenching volatility. Enter annuities. Once considered sleepy vehicles for conservative investors, today’s annuities are more sophisticated, more flexible, and—for the right investor—more powerful than ever.
We’re seeing increasing interest in annuities from clients who aren’t interested in market timing but are very interested in tax deferral, downside protection, and income security.
Let’s break down the main types of annuities high-net-worth clients are using to hedge risk and optimize outcomes in a $1 million portfolio context, including how riders and income strategies can tailor them to fit broader estate, tax, and legacy goals.
The Big Three: MYGAs, FIAs, and RILAs
According to industry research, more than 80% of new annuity flows are going into three key types: Multiyear Guaranteed Annuities (MYGAs), Fixed Indexed Annuities (FIAs), and Registered Index-Linked Annuities (RILAs). Here’s how they stack up.
1. MYGAs: For Certainty in an Uncertain World
A MYGA (Multiyear Guaranteed Annuity) is the fixed-income investor’s best-kept secret. Think of it like a CD on steroids—without the annual tax drag.
Current landscape:
High-quality insurers (rated A- or better) are offering 5–6.5% annual yields on 3–7 year MYGAs. For comparison, a typical 5-year CD is hovering around 4.5%.
Tax Edge:
With a CD, interest is taxed annually as ordinary income—even if reinvested. With a MYGA, growth is tax-deferred until withdrawn. For a high-earner in a 37% bracket, this deferral can meaningfully enhance after-tax yield.
$1M Example:
A $1M allocation to a 5-year MYGA at 6.25% would grow to $1,355,000 tax-deferred. That’s $355,000 in gain shielded from current taxation. In contrast, a taxable bond or CD could reduce that growth by over $130,000 due to annual taxes.
Who it’s for:
Investors looking to lock in yield with principal protection—especially as part of a bond replacement strategy inside a taxable account.
2. FIAs: The “Some Upside, No Downside” Play
Fixed Indexed Annuities link returns to the stock market indices (such as the S&P 500), but without exposure to downside. Gains may be capped or subject to a participation rate.
Mechanics:
- Participation Rate: If your FIA has an 80% participation rate, and the S&P 500 grows by 10%, your annuity would be credited 8% of that gain (10% × 80%).
- Caps & Spreads: Some FIAs cap gains at a max rate (e.g., 10%), while others use spreads, subtracting a set percentage from the gain.
- No Market Losses: Even if the market declines, your principal is protected, meaning you won’t lose money due to stock market downturns.
Tax Perk:
Like MYGAs, FIAs grow tax-deferred. That makes them excellent options for clients who’ve already maxed out tax-deferred retirement vehicles but want more exposure than cash or bonds.
Add a Rider:
Want guaranteed lifetime income? Income riders can be attached, offering guaranteed withdrawal benefits (often 5%–7% of an income base), sometimes with market-linked growth.
$1M Example (Income Focused):
If the annuity includes a guaranteed income rider growing at 6% for deferral, and you defer income for 10 years, the income base becomes $1.79M. With a 5% lifetime withdrawal rate, you could receive $89,500/year for life, even if the actual account value is lower. That’s powerful insurance against outliving assets.
Who it’s for:
Investors worried about outliving their portfolio, or looking to balance market participation with principal protection.
3. RILAs: The Risk-Tolerant Hedger’s Best Friend
Registered Index-Linked Annuities offer partial downside protection with greater upside potential than FIAs. These are SEC-registered products with structured returns.
Key Terms:
- Buffer: Insurer absorbs first X% of loss (e.g., 10% buffer = first 10% loss absorbed).
- Cap or No Cap: Some RILAs are capped, some aren’t.
- Liquidity: Lock-up periods of 6–7 years are common, with 10% annual penalty-free withdrawals.
$1M Example:
With a 6-year RILA offering a 10% buffer and no cap, your upside is theoretically unlimited—but you’re protected from the first 10% of losses. If the S&P 500 grows 80% over 6 years, you get all 80%. If it drops 12%, your net loss is just 2%.
Who it’s for:
Sophisticated investors who want market-linked returns with some downside guardrails, often in a taxable or IRA account. Not for short-term needs or those requiring full liquidity.
Don’t Forget the SPIA: The Old-School Workhorse
Single Premium Immediate Annuities (SPIAs) don’t make headlines, but they make retirement work. You give an insurer a lump sum, and in return, receive guaranteed income for life, starting immediately.
$1M Example (Male, Age 65):
A SPIA might offer $70,000–$75,000 per year for life, depending on rates and health underwriting. That’s a 7%+ payout rate—hard to match without taking on risk.
Best Use:
For covering essential income needs in retirement, replacing a pension, or guaranteeing income for a spouse who isn’t investment-savvy.
Tax-Deferred Growth: The Hidden Compounding Machine
A common thread across annuity types: tax deferral.
Unlike taxable accounts, annuities allow compounding to occur without annual tax friction. For high-income earners who’ve exhausted other tax shelters, this can be a meaningful advantage—especially when paired with downside protection.
And in turbulent markets, the peace of mind from knowing your account can’t drop 20% in a bad year may be worth just as much as the tax benefit.
Caveats:
- Withdrawals are taxed as ordinary income on the growth in the account.
- Annuities aren’t for short-term liquidity needs. Earnings from these insurance products are subject to a 10% penalty if assets are withdrawn before age 59½.
- Most annuities hit you with surrender charges if you withdraw more than 10% of your assets within the first three-to-seven years of your contract.
- Death benefits may be taxable unless structured carefully inside a trust.
Tailoring with Riders
Annuities can be highly customized with riders, including:
- Income riders: For lifetime withdrawals, even if the account value goes to zero.
- Long-Term Care riders: To double or triple income if you need extended care.
- Death benefit riders: To lock in legacy values or enhance payouts to heirs.
- Return-of-premium riders: For clients concerned about losing principal in flat markets.
Each rider comes with additional costs, typically ranging from 0.1% to 1% of the annuity value. Not all providers offer every rider, so it’s important to compare options. The right combination depends on whether your goal is accumulation, income, legacy, or all three.
Final Thoughts
Annuities aren’t magic—but in the right hands, they are a toolbox filled with income certainty, downside protection, and tax deferral. For high-net-worth investors concerned about sequence risk, taxes, or outliving their portfolio, allocating $500K to $2M into annuities (in various forms) could strengthen an otherwise market-heavy strategy.
At EsqWealth, we don’t sell annuities directly—we design financial blueprints. If an annuity fits your plan, we’ll help you understand the options, avoid the pitfalls, and align the strategy with your long-term legacy goals.
The information above is not intended to and should not be construed as specific advice or recommendations for any individual. The opinions voiced are for general information only and are not intended to provide, and should not be relied on for tax, legal, or accounting advice. To discuss specific recommendations for any unique situation, please feel free to contact us.
