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Annuities vs Stocks

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Annuities vs Stocks

Two investment options on completely opposite sides of the spectrum are annuities and stocks.

As we learned from our many posts here on Annuities Explained, annuities are geared toward the investor that is looking for a guaranteed rate of return and is willing to exchange the possibility of a higher rate of return for that guarantee. As with most risk free investments the rate of return on an annuity is typically not very high, say around 5% depending of course on the annuity contract that you signed with the issuer.

Annuities are great for investors who are close to retirement or are just very risk averse and are looking for a sense of security in their investment regardless of whether or not their money could be making more elsewhere. They are also good investments for people who have a large sum of money (either a pool of retirement savings, an inheritance or lottery winnings) and are looking to spread these funds out over a long period of time rather than just having it sit in a bank account. (For more information on annuity options please see our article on the different types of annuities).

Stocks on the other hand are one of the more risky investment options that people have. Over time stocks have outperformed almost all major investment options, but at the same time you you do not have your portfolio diversified enough, and do not balance out the risky stocks with more secure blue chip or steady dividend stocks, then you run the risk of losing your entire portfolio as well.

Unlike fixed annuities, a single stock, or a group of stocks provides a completely variable rate of return, including 100% of the money you invested should the stock ever become worthless. Fixed annuities may not return a huge percentage on your investment, but since they are guaranteed you will be getting something for sure, and if you invest in the wrong stock you could lose everything. If you still want to get a rate of return based on the market you could try variable annuities instead as well.

Of course any wise investor understands the value of a balanced portfolio, so the comparison of annuities vs stocks is a simplified one because there is no reason you couldn’t have both an annuity, a handful of stocks, some mutual funds and a mix of bonds and other secure investments.

Ultimately the choice of annuities vs stocks comes down to the individual investor and their goals. For a younger investor who has a long time before retirement a diversified portfolio of stocks might make more sense because it has a long time to grow and the investor has a long time to make back any losses they incur if their investments go south. Individuals closer to retirement on the other hand should look more at annuities, especially fixed annuities, so they can guarantee that their retirement savings wont be lost. Ultimately the choice is up to you, but be sure you understand your investment class before deciding on stocks or annuities.

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