Why Annuities are Safer than Stocks
When looking at annuities as retirement vehicle, it's important to ask if annuities are safer than stock. And the answer is yes! There are two types of annuity we should consider:
Fixed Annuities: These are unequivocally safer than a stock market investment because they offer guaranteed rates. And although even a guaranteed rate can drop 1-2% after the guarantee period ends, a fixed annuity can never lose principle. That's why fixed annuities are ideal for retirement.
Variable Annuities: These are safer than stock market investment too, but aren't as secure as their fixed counterparts. Variable annuities are a collection of different kinds of securities, which could include bonds, stocks, and treasuries. There is risk of principle loss, but less so than with straight-up stock investing. Because a variable annuity disperses your money across a wide range of conservative growth equities, chances for loss are greatly reduced. Compare this to buying stock in a handful of specific companies, which are prone to failure and market volatility. Like that old saying: don’t put all your eggs in one basket.
There’s that other saying: safety in numbers. By having your money in many investments, some may go down, but others will go up. In this way, the overall trend can be upward, and you make a better return and preserve capital if the stock market tumbles.
Annuities and Portfolio Management
Managing a handful of volatile stocks is a job unto itself, and should be handled by a professional unless you have time to stay in tune with the market on a daily basis. A fixed or variable annuity, like a CD or 401(k) is relatively hands-off. In the case of a fixed annuity it's invest and forget. In the case of a variable annuity, you have the option to manage your own sub-accounts, but have the insurance company's broker do it for you. And, even if you are managing your own sub-accounts, because they're far more stable, they don't require the same degree of attention as traditional stocks.
Besides having less potential risk, annuities offer many great benefits over stocks and mutual fund investing, especially for retirees.
- Less paperwork
- No tax statements generated from constant selling and buying
- Backed by State reserve pools (in case of insurer insolvency)
- Death benefit options
- Annual withdrawal allowances upwards of 10%
If getting access to your money is important, annuities can oddly be better than stocks. Although annuities are long-term investments, with penalty fees for early withdrawal, many allow for partial withdrawals penalty-free. In contrast, stocks are always liquid, but in reality if the market is down, your cash is committed, and cashing out could be more costly than any withdrawal penalty tied to an annuity.
Managing Retirement Risk
Retirement investing demands a careful, judicious approach. As you get older and amass more and more savings, its wise to scale back on equities (stock market) and place more funds in interest-base vehicles like bonds, treasures, and high-quality mortgages. Annuities are designed to do just that, with tax-deferred growth and many other highly-desirable features for future retirees.
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