Should Annuities be Purchased from Tax-Sheltered Assets?

Forthcoming in Journal of Financial Services Professionals

22 Pages Posted: 2 Aug 2019 Last revised: 5 Aug 2019

See all articles by David Blanchett

David Blanchett

Morningstar Investment Management

Michael S. Finke

The American College

Date Written: August 2, 2019

Abstract

Retirees who purchase an annuity may assume that retirement savings accounts are ideal for funding retirement income. Annuities, however, are a tax-favored investment. We investigate the relative benefits of purchasing an annuity from tax-deferred and taxable accounts for various payout levels, tax rates, asset tax efficiency, and assumed portfolio rates of return. We find considerable evidence that investors are better off using non-qualified accounts to purchase annuities, although the benefits vary significantly by investor characteristics and the tax efficiency of investments held in non-qualified savings. In some cases, selecting the right account increases the after-tax income by over 10% which is equivalent to approximately 50 basis points of added portfolio return. A 15-year deferred annuity purchased from non-qualified vs. qualified bonds earning 4% provides over 30% more after-tax income for a 65-year old with a 40% marginal tax rate.

Keywords: annuities, retirement, personal finance

JEL Classification: D14, G11, J26

Suggested Citation

Blanchett, David and Finke, Michael S., Should Annuities be Purchased from Tax-Sheltered Assets? (August 2, 2019). Forthcoming in Journal of Financial Services Professionals, Available at SSRN: https://ssrn.com/abstract=3431206 or http://dx.doi.org/10.2139/ssrn.3431206

David Blanchett

Morningstar Investment Management ( email )

22 W Washington
Chicago, IL 60602
United States
859-492-5637 (Phone)

HOME PAGE: http://www.davidmblanchett.com

Michael S. Finke (Contact Author)

The American College ( email )

Bryn Mawr, PA 19010
United States

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