“Some experts tout brokerage accounts as a more efficient retirement vehicle than annuities? Paul Hubbard III
If you have a fixed annuity or are considering purchasing one, you probably know that these instruments have significant advantages for the safe money portion of your portfolio. However, many financial advisors steer their clients away from investigating fixed indexed annuities and insist that having a brokerage account is the better choice.
But, is it necessary to choose one over the other? The truth is that although brokerage accounts and annuities may finance identical objectives, that doesn’t mean these products are mutually exclusive. Many retirees and pre-retirees can and do strategically include both.
Annuities and brokerage accounts can benefit those who:
- Seek steady portfolio growth.
- Want to create an income stream
- Are looking to maximize Social Security
- Need tax-advantaged income.
Annuities, however, have some additional benefits that brokerage accounts typically cannot provide.
Guaranteed income for life. Subject to the issuing company’s claims-paying ability, annuities are the only financial tools that create lifetime revenue while protecting against market volatility.
Protection of principal. A fixed annuity contract ensures that your initial investment is guaranteed. That’s not true for a brokerage account.
Death benefit. Fixed annuities are more flexible and customizable than you might imagine.
Many companies offer optional death benefit features in the form of “riders.” The most common of these are basic death benefits and enhanced death benefits. Those wanting to leave a legacy to their heirs usually choose enhanced benefits added via riders. Such riders often offer what are known as “step-ups,” which is when the issuer steps up the annuity’s value on the anniversary of when you started it. There are numerous forms of enhanced death benefits. The two you’ll see most often are Highest Balance and Guaranteed Minimum Death Benefit, or GMDB. Ask your annuity expert to explain the different options in more detail before deciding. Remember that once you’ve started an annuity’s payouts (annuitization), there is no death benefit. However, there are ways to make sure that any unused funds in your annuity pass to a spouse or other loved one when you die.
Tax-deferred growth. The money you put into a fixed annuity receives favorable treatment in the form of tax-deferred growth.
Income from an annuity is tax-advantaged. Those who invest in stocks pay taxes on capital gains and dividends unless the money isn’t in a retirement account. These tax liabilities reduce your net return.
Provisions to offset the costs of long-term care. Certain annuities may help offset long-term care expenses not covered by Medicare. This benefit can be particularly appealing to those who cannot qualify for traditional long-term care insurance or cannot afford the high premiums.
Bottom line: If you are interested in growth and income but hesitant to put your money at risk, you might consider adding an annuity to your retirement plan, even if you currently have a brokerage account. Including both may give you more benefits and greater peace of mind as you seek to minimize the impact of inflation and longevity on your wealth. Always seek the advice of an experienced financial professional who understands the best strategies for ensuring your money doesn’t run out when you stop working.