Annuity vs. Stock Market – Which is Better?
Believe it or not, I still get this question all the time. Only you know the right answer for your retirement planning.
They're two totally different types of investment - opposite even. Annuities are insurance products with contracts issued by life insurance companies, period. Stocks are what they are. Do I have to explain that to anyone out there? In most cases, you buy them for growth. You buy them because you like the company, you think you're going to get value out of the company. One is not better than the other. They’re two different options. Let’s look at some of the differences.
Annuities don't solve for market growth. Now, I warn you that you're going to be pitched annuity types like variable annuities and index annuities like they will get market growth. Bull pucky. But variable annuities have an argument because there are mutual funds inside of an annuity policy. But the reason I say don't buy an annuity for growth is that even variable annuities have limited choices, and when you're talking about stock market growth, I do not think you need limitations on the upside.
I used to work for all the big firms so I know what I'm talking about here. Annuities are transfer-risk products. If you want to transfer risk then fantastic. They primarily solve for lifetime income and principal protection and annuities have a monopoly on lifetime income. It's the only product on the planet that can pay you regardless of how long you live. Does that make it better than stocks? No, it makes it different. Social Security’s an annuity, pensions an annuity, stocks, they are what they are and they certainly do have their place. So just remember this. If you want to transfer risk and have a contractual guarantee then chose an annuity. If you want to solve for market growth look at the stock market.
Is an annuity a good investment?
It can be. It depends on what you're trying to achieve. I don't even categorize an annuity as an investment. An annuity is a contract issued by a life insurance company. It's a transfer of risk strategy. You're transferring the risk to the annuity company to solve for a specific goal. In most cases, that goal is lifetime income. It also could be principle protection, legacy, or long-term care. You don't look at a pension as an investment. No. That's a lifetime guaranteed income stream provided by your company.
Can you lose your money in an annuity?
If you want to transfer risk and have a contractual guarantee then chose an annuity.
Depends on the annuity type. There are several types of annuities and one that could lose you money is a variable annuity. And that is the number one reason why I don't sell variable annuities. I don't sell anything that can lose money. I sell only fixed annuities because that's what I believe in. That doesn't mean variable annuities are bad, but yes, you can lose money because variable annuities are tax-deferred growth products that were put on the planet in 1955 using mutual funds.
The bottom line the short answer is yes. You can lose money in an annuity if it's a variable annuity. With fixed annuities, you can structure it so you'll never lose a penny. The only other asterisks to that is if the company goes out of business, but when you're dealing with Stan The Annuity Man, that's not an issue because we deal with the best carriers on the planet.
So annuity vs. stock market really comes down to what you want to do - risk or no risk? At the end of the day, I’ll always say that an annuity is only one piece of the retirement portfolio. So you could have both options working for you to help you rock your best retirement life. If transferring risk sounds like the route for you, book a one-on-one call with me today. I won’t be your best friend, but I will be your best financial advisor.