Annuities vs. Stocks

Two common yet completely different and opposite investment tools are annuities and stocks. Starting off with the annuity, annuities generally lean towards investors seeking a guaranteed or secure rate of return, willing to forgo the possibility of a higher rate of return for such guarantee. The annuity is desirable among those who wish to avoid market risk.

Annuities are perfect for those investors who are nearing their retirement and/or are very risk averse, seeking security in their investment, notwithstanding whether they could be earning more from a more risky investment. The annuity is also good for those who are about to retire. With annuities, they may spread their funds over longer periods, instead of just leaving them in a bank account.

On the other hand, stocks are for those more risky investors. Stocks potentially provide the most return an investor can get from any of the investment options. However, at the same time, stock investors sacrifice the security of their investments, as more risk exists in stock options. Moreover, in dealing with stocks, investors may risk losing his or her entire portfolio, since his or her portfolio may not be diverse enough.

One of the more commonly known types of annuities is the fixed annuity. Which provides a fixed rate of return, which as mentioned is guaranteed to the investor. Unlike the fixed annuity, a stock provides a variable rate of return added on top of the money the investor initially invests, in case the stock becomes of no value. With annuities, an investor may not necessarily have a huge percentage return on his or her investment, but will be guaranteed to be getting something. However, with stocks, investing in the wrong types, an investor may end up losing everything.

Nonetheless, a smart investor may have a diversified portfolio, meaning he or she may have annuities and a good amount of stocks, coupled with other investment options such as mutual funds and bonds.

The decision whether to choose annuities or stocks boils down to the individual investor and his or her perceptions, preferences and goals. For those who are still far from retiring, and are more interested in maximizing investment returns, they may opt for a healthy and diverse portfolio of stocks. This is simply because such an investor may be able to bear waiting a long time for the stocks to grow, and can also afford for the stocks to incur losses. On the other hand older individuals, or those close to retirement, may opt to go with annuities, especially fixed annuities, which guarantee that whatever they save in such an investment option would not just go down the drain.  The decision variables generally boil down to whether the prospective investor is risk averse or risk loving. The decision may boil down to whether the investor would risk losing everything for much larger rates of return or whether the investor would not want to risk it all but would like to secure his or her future savings. The choice is ultimately up to the individual. The choice at the end of the day is up to you.

Annuities are best suited for long term investors.  Any withdrawal prior to age 59 ½ is subject to a 10% tax penalty as well as regular income tax.  Annuities often also have a surrender schedule, meaning that withdrawals may be subject to a penalty by the insurance company if not left in for a predetermined amount of time.  Any guarantees on principal invested is based upon the claims paying ability of the underlying insurance company.