by Annuities Explained on January 31, 2010
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.
© Annuities vs Stocks
by Annuities Explained on January 20, 2010
With the market reaching lows we haven’t seen since the great depression and with retirement investments going in the tank faster than people could pull their money out of them many investors are wondering what the risks of investing in annuities are, and with good reason. Annuities are one of the more confusing investment options so understanding annuity risks is important before sinking your money in. Don’t worry, Annuities Explained is here to help.
Fixed annuities as a rule are relatively “risk free”, or at least more risk free than stocks or mutual funds since the rate of return on most fixed annuities is guaranteed by the issuer. The problem lies within the issuing company itself and its ability to make annuity payments as guaranteed.
Over the last few years insurance companies like AIG and banks like Wachovia and Washington Mutual really fell on hard times and if not for a government bail-out would have collapsed. When you put all of your retirement investments in a single company like this then you run the risk of not being able to recoup your investment should the company go under completely.
Unlike certificates of deposit, which are protected by FDIC up to $100,000, annuities are not protected by the FDIC and therefore present more risk. Annuities do have some protection however in that the companies are required to pay off annuity holders before paying off debtors, so if the company is liquidated you stand a chance of getting some or all of your investment back.
As a result of this risk it’s important to consider the financial strength of the company that you are investing with and gauging what kind of future this company will have, especially if you are far away from retirement.
In comparison to certificates of deposits, annuities have a much higher rate of return, but as mentioned earlier CDs have the benefit of FDIC protection which for the typical investor should cover their entire investment. When deciding whether or not to buy an annuity this is an option that should definitely be considered. Even if the bank goes under, you will still be guaranteed your money unlike what would happen if an annuity provider went under.
Another annuities risk that you have to account for is the risk of locking in to a rate of return that is lower than you could get with a similar investment option elsewhere. Since annuities have a guaranteed rate of return, they don’t return a high yield like stocks or mutual funds would. If you need anything other than a low risk, low yield rate of return then you would probably be wiser to look elsewhere, otherwise you are risking the loss of potential income and you can find some relatively low risk mutual funds or bonds to invest in.
Bottom line, annuities are a relatively low risk option but they aren’t 100% risk free. Anything short of a government backed investment option will always have some risk associated with it and annuities are no different. Before investing in any annuities, whether fixed annuities or variable annuities, be sure you understand all of the pros and cons of annuities and you will be better off in the long run.
© Annuities Risk
