Which Is Right For Your Financial Future? – Forbes Advisor


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Planning for retirement often boils down to a choice between annuities and other investments. But which is right for you, or should you consider both?

Going over the pros and cons of annuities and investments can help you decide which one to choose. Perhaps, after learning how to understand both categories, you might even end up going with both options as part of your retirement planning.

Pros of Annuities

To appreciate the pros and cons of annuities, you need to understand what annuities are.

An annuity is a contract between you and an insurance company where you pay them, either in a lump sum or through multiple payments. In return, the insurer agrees to pay you, either immediately or in the future, in one or a series of payments.

Here are some of the benefits of annuities.

Guaranteed Income

A life annuity—also known as a lifetime annuity—provides guaranteed income for as long as you live, even after the insurer’s payouts have matched the amount of money you chipped in. The Insurance Information Institute calls this type of annuity a “personal pension plan” that can supplement benefits from Social Security, any retirement savings you have or an employer-backed pension plan.

Normally a life annuity makes payments to the annuity owner, who is known as the annuitant, for as long as the annuitant is alive. An alternative format is known as a fixed-period annuity, which provides income for a specified period of time, such as 10 years.

In addition, if the contract offers it, the owner of a life annuity can arrange for a death benefit.

Death benefits are triggered by the death of the annuitant. Death benefits go to the annuitant’s estate or to beneficiaries named in the annuity, whichever recipients the annuitant specifies in the contract.

Death benefits are usually paid in a single lump sum, but sometimes they are paid in installments over time. Those installments can last for some preset period, such as a certain number of years or for an indefinite period, such as however long the beneficiary or beneficiaries live.

Tax-Deferred Savings

Another key advantage of annuities is that you don’t pay any income taxes on the principal or gains until you start receiving payouts. If those payouts begin during retirement, you may be in a lower tax bracket by then.

No Contribution Limits

Unlike individual retirement accounts and 401(k) plans, you can contribute as much money as you’d like to an annuity. But if you open an annuity by making just one premium payment—rather than paying premiums over time—you can’t add more funds later.

Pros of Investing

When you’re planning your retirement, you’ll likely contemplate a range of investments as vehicles for generating later-in-life income. Here are some of the advantages of including some investment vehicles in your retirement portfolio.

Variety of Products

When it comes to investing there are many types of assets in which you can put your money to work. These include:

Attractive Returns

Over time, various investments can deliver impressive returns—despite year-to-year fluctuations.

Data compiled by New York University’s Stern School of Business shows that $100 invested in the S&P 500 Index stocks at the start of 1928 would have been worth nearly $625,000 by the end of 2022—including stock dividends. That same $100 invested in U.S. Treasury bonds would have grown to a little over $7,000. Meanwhile, $100 worth of gold would have been worth nearly $8,900.

These historic returns demonstrate how the value of investments can grow over the long term. Frequent buying and selling incurs transaction costs. It whittles down your gains in other ways too. For one, individual investors who dart in and out of the market tend to miss out on parts of market rallies.

Tax Advantages

A number of investment accounts geared toward retirement provide tax benefits. For instance, contributions to a traditional IRA may qualify for a tax deduction and your earnings grow on a tax-deferred basis. Meanwhile, after-tax contributions to a Roth IRA don’t qualify for an up-front tax deduction, but qualified withdrawals aren’t taxed.

Cons of Annuities

Just as annuities come with pros, they also come with cons. Here are some of the disadvantages of annuities.

Investor Confusion

When it comes to annuities, there is the chance for confusion. Why? Because annuities come in three forms—fixed, variable and indexed—that work in different ways:

  • A fixed annuity guarantees you’ll receive the principal you invested, plus interest paid at a minimum rate, over a certain period of time. Therefore, the money in a fixed annuity will grow and won’t decline in value, providing a predictable stream of income. These days, the annual interest rate for a fixed annuity can exceed 5%.
  • The value of a variable annuity goes up or down, based on the performance of its underlying investments. That makes this the riskiest type of annuity. The investments often are made in a mutual fund that’s available only to professional investors who run insurance company annuities.
  • The returns of an indexed annuity generally are tied to the performance of a stock market index, such as the Dow Jones Industrial Average and S&P 500. With an indexed annuity, you can earn a higher return than a fixed annuity but a lower return than a variable annuity. It’s a hybrid annuity, combining the security of a fixed rate of return with the volatility of the stock market.

Beyond the three types of annuities, there are also immediate and deferred annuities. Those can add further confusion for someone who’s considering an annuity or has already purchased one.

With an immediate annuity, you make a single lump-sum contribution upfront. This contribution converts to a set level of income over a specific period or over a lifetime. On the other hand, a deferred annuity provides payouts starting on a future date that you set.


Various expenses can accompany annuities, including administrative fees, investment management fees, “surrender charges” for sizable withdrawals and costs for contract add-ons. These expenses may water down your payouts.

In addition, you might have to pay a 10% tax penalty if you withdraw money from an annuity before age 59½.

Lack of Liquidity

Since annuities are geared toward generating steady income, they’re not meant to be a source of immediate cash. Surrender charges and tax penalties on withdrawals before age 59½ constitute a disincentive to withdrawals. You can’t access your future benefits immediately. Although you’re entitled to certain funds, they won’t be available until a specified date. Currently, your money isn’t liquid.

Cons of Investing

While investing provides a number of benefits, disadvantages also abound. Here are some of the cons of investing.


Perhaps the greatest risk of investing involves volatility, which can unnerve some investors.

The value of investments, such as stocks, bonds, mutual funds and ETFs, can rise or fall in the short term and long run. For instance, total returns for S&P 500 stocks climbed 28.7% in 2021 (including dividends) but dropped 18.1% in 2022.

Tax Burdens

Retirement vehicles like IRAs and 401(k) plans are designed to reduce your tax burden, which is a good thing since taxes can eat into the total returns on your investments. For instance, the sale of individual stocks may result in capital gains taxes up to 37% for the 2023 tax year, depending on when the sale occurs and what your taxable income is.

Capital gains are the profits you rack up when you sell an asset.

Lack of Liquidity

Unlike money in a savings account, you may be unable to instantly tap into an investment, such as shares of individual stock or shares of stock held in a retirement account, to generate cash. While you normally can access cash in a savings account pretty quickly, it may take several days to receive proceeds from the sale of an investment.

Should You Pair Annuities With Investments?

Annuities can complement traditional investments by offering attractive payout rates, balancing investment volatility and accommodating longer life expectancies.

Before including an annuity in your retirement portfolio, though, you should review the pros and cons with a financial advisor. Depending on your circumstances, you may find that purchasing an annuity would boost your portfolio or would be an undesirable investment.

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