Legacy Stabilization Using Income Annuities

Abstract

Although it is generally agreed that income annuities (including both immediate and deferred income annuities) can help prevent investors from exhausting their assets during retirement, it is a common misconception among financial planners and wealthy investors that using income annuities will inevitably reduce the size of an investor’s estate. In fact, in many instances annuities are as likely to increase the size of an estate as to decrease it. In such cases, the effect of income annuities—when used appropriately—is a large reduction in the uncertainty associated with retirement planning, accompanied by a smaller but still significant reduction in the uncertainty associated with legacy planning. The authors demonstrate that annuities can be used both before and after retirement to reduce uncertainty surrounding the size of an estate, roughly maintain its expected size, and at the same time eliminate the risk of complete asset exhaustion during retirement.