Annuities sales are soaring to highs not seen since the Great Depression, and the industry is on the verge of successfully lobbying Congress to make annuities an automatic default option in retirement plans. Even so, Morningstar has released research that says annuities deliver little benefit to investors above certain wealth levels.

The firm says annuities add little upside for investors if their wealth is already more than 36 times their needed annual retirement income. That assertion comes from a report by Morningstar’s Center for Retirement and Policy Studies entitled, “The Retirement Plan Lifetime Income Strategies Assessment."

For example, the report said, if an investor needs $50,000 a year in retirement and has already accumulated $1.8 million in assets, there are better strategies for maximizing retirement income than annuities.

“We found that the ratio of wealth a participant has to their annual retirement income need is the most important metric for determining the benefits of a lifetime income strategy,” says Spencer Look, Morningstar’s associate director of retirement studies and public policy, in an interview with Financial Advisor. Look co-authored the study with Aron Szapiro, head of retirement studies and public policy at the firm.

“Annuities do not add much value when an investor is already well-prepared for retirement,” Look adds. “They also do not help much when Social Security or other guaranteed income sources already cover the majority of anticipated retirement expenses.”

Overall, Morningstar evaluated how seven different strategies can help retirees reach their income and estate planning goals. If a client has amassed at least 36 times their retirement income needs, one strategy that can serve them better, Morningstar says, is the benefit of “Social Security bridging”—using alternative sources, such as 401(k) assets, to delay claiming Social Security benefits until the maximum possible age.

“Retirees should consider Social Security bridging before other lifetime income strategies,” Look says. “While annuity-based strategies can boost guaranteed income or bequests, none can compete with the Social Security bridge strategy to offer more generous benefits.”

Unlike private annuities, Social Security has no profit margin requirement. Furthermore, the government program’s benefits are based on the life expectancies of the U.S. population, not the above-average life expectancies used by insurance companies. Social Security also offers inflation protection.

“While some private annuities offer a cost-of-living feature, it is not comparable to Social Security, where the benefits are linked to the Consumer Price Index for urban wage earners and clerical workers,” says the report. “Nevertheless, there is still a place for annuities as we find that participants can benefit when annuities are combined with the bridging strategy.”

The analysis also found that while health issues can worsen retirees’ standards of living, “we do not find that they change the relative value of lifetime income strategies as long as the plan participant has the right profile to benefit from annuities to begin with and only uses part of their wealth for the annuity purchase."

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