Stocks vs. Bonds vs. Annuities: Which Option Offers Greater Safety?
Evaluating Risk Factors
When considering personal goals and making investment choices, it is crucial to evaluate the risk factors associated with each option. Stocks, bonds, and annuities each carry a different level of risk, and understanding these risks is essential for making informed decisions.
Comparing Stocks and Bonds
Stocks and bonds are both popular investment options, but they differ significantly in terms of risk and potential returns. Stocks represent ownership in a company and are known for their potential high returns, but they also come with higher volatility and a greater risk of loss. On the other hand, bonds are debt instruments that offer a fixed income stream and are generally considered less risky compared to stocks. Bonds are often seen as a safer investment choice for those seeking more stability in their portfolio.
The Safety of Annuities
Annuities are unique investment products that offer a guaranteed income stream, making them particularly attractive for individuals looking for a safe and stable long-term investment. Unlike stocks and bonds, annuities provide a fixed income for a specified period or even for life, acting as a form of insurance against outliving your savings. Annuities offer safety and security, as well as protection of your gains compared to riskier investments like stocks. Assessing your personal goals and risk tolerance is crucial when deciding whether annuities are the right choice for you
In Summary…
Video Transcript:
”Hello everybody. I wanted to take some time here to talk about stocks versus bonds versus annuities. This is a conversation that comes up a lot with my clients and for the most part I can give them a pretty simple answer and we’ll see if these answer some of your apprehensions. Most of us have been brought up to appreciate the Standard and Poor’s. You know, these are the top companies. A lot of the benchmarks of investing is based on the Standard and poor’s. And this is, this is a group of companies that are made up of, you know, that that consists of stocks and bonds. Bonds are government. Vehicles. So, you know, some people will have an account that’s 50 percent stocks, 50 percent bonds, maybe interest rates are going up.
So I want to get some bonds. Maybe interest rates are going out down. I want to get some stocks. So it’s, it’s a guessing game. You know, it’s, it’s like legalized Las Vegas, but that’s a lot of what we’ve been led to believe is our only option. Many of the 401ks consist of options to invest in stocks and bonds and a cash account.
And a person will maybe look at their account and say, Hey, I’m not sure what’s going on with the market here. I’m going to move my money into cash. So you’re not going to lose anything, but you might be making one or two percent. So you’re not even keeping pace with inflation. So really your account, even though it doesn’t lose anything, it did lose something because it’s not keeping pace with inflation.
So, one of the other options that’s out there are annuities. And annuities if you’re talking to a broker, you know, a financial broker, an equities guy, he doesn’t like annuities. And I can’t say this is the same for everyone, but a lot of them, they don’t like them or they’re not able to sell them. So the big brokerage houses, you know, they can’t maybe even sell them.
And I’m going to give you my reason why. All right. One is a broker’s objective is to accumulate as much money as they can from their customers. So they want to accumulate customers and then accumulate that so that they have what’s called money under management. So they’d like to have a million, 10 million, a hundred million dollars under management.
Cause you know what? They make money when the account goes up. And they make money when the account goes down. So even if you’ve had a bad year, they still made money. And this is based on the fees and the fees are sometimes very, very hard to find, but I’m going to simplify this. Let’s say the fee is 1%.
You say, that’s not a whole lot of money. You know, good for that guy. He’s got to feed his family. So if you have 1%. And you’re paying you have $100,000, that’s $1,000 a year that, of a fee that’s not going into your account and that’s not accumulating that that broker is getting paid. And if you look over that’s 10 years, that’s $10,000.
You know, let’s say your account didn’t make anything. Let’s say it was just flat. The broker still made $10,000. And again, I’m not saying this is because it’s a bad thing. It’s just the way it is. So somebody thinks 1 percent isn’t a whole lot. Well, again, you do the math. So if it’s a million dollars, do the math, it’s, it’s a considerable amount.
So if a, if a broker who’s good, and there’s a lot of good ones out there, has a million dollars, five million, ten million under management. You do the math, you know, it’s, it’s pretty good income. It’s a pretty good deal. Now, the situation with annuities is different. Annuities when a person puts their money into an annuity none of what’s paid to the agent comes from your money.
The agent that sells the annuity is paid by the insurance company. So no money is pulled out. If you put a hundred thousand dollars , a thousand of it isn’t going to go to the agent. And again, annuities are sold by insurance agents. So you put in a hundred, a hundred is going to grow.
Now, what brokers will try to tell you and scare you away is that, oh, annuities have surrender charges. And basically what this is, is this allows the insurance company who, own these annuities to put your account in a environment where you are never going to lose a penny. So if the market drops, your annuity value does not drop.
It might not grow, but it’s not going to drop. In a stock and a bond account, the market drops, your account value drops. So if you have a stock or a bond account and it drops 10 percent and you have $100,000, you now have $90k. In an annuity, if you have $100,000 and what the annuity was invested in drops 10%, Your account risk is going to be at zero.
So you’re still going to have $100,000. All right. And it’s very key to understand this. See annuities are not meant to be like a bank. If somebody told me I’m going to put my money in an annuity, I see the annuity is doing very well and it’s safe.
And I’m going to pull out a bunch of money the next year. I would tell you don’t buy that annuity. Annuities are long term type of investments. Annuities do give you the option to take, some annuities, but for the most part, you’re allowed to take out 10 percent a year with no surrender fee.
And I just had a client that took out her 10 percent earlier in the year. She needed some more money. Her annuity is about eight or nine years old. It had a 4 percent surrender because the surrender charge goes down over time. So, it may start at 10, 9..8..7, 6..5..4 and it’s in your account. You know, when you get an annuity, you open it up.
You know, it’s kind of about the size of a magazine and it’ll show you what your surrender charge is and the agent selling you the annuity will show you that on the illustration as well. So, hers was about 4%. So, she was going to take out I think 3, 000. So she was going to get a surrender charge of 120.
Okay. And then next year it’ll be at 3%, 2%. If you keep that annuity for the whole period of time, whether it’s a 10 year annuity, a 15 year annuity, a five year annuity, then there’s no surrender charges. So then you’re free to take out as much as you want subject to whether the money was, you know, as far as taxes, subject to whether it was a qualified or non qualified.
And that’s again, you can kind of talk to your CPA on those kinds of things. But it’s nothing to be scared of, it’s just a word. You hear surrender, a surrender fee, you know, people get scared away. Your 401(k) can be funded with an annuity. I have a lot of customers that had a 401k from a previous employer, and we’ve rolled that into an annuity.
And it was intended for long term, 10, 20, 30 years. An annuity isn’t something you put money in and then you want to take money out. But, you know, you can do the 10%, but I said the intention of the annuity is long term money. So if I have 20, 30 somethings that took a 401(k) or had a 401(k) from a previous employer, that conversation with them is, are you going to need this money in the next 20 or 30 years?
Now, we don’t have a crystal ball, but for the most part, you know, are you going to be purchasing a house or are you going to be needing this money? You know, are you going to be buying a car or are you going to be needing this money? You know, and if they said yes to either one of those, I wouldn’t put it in an annuity.
But if they said, hey, this was my 401k, it was intended for retirement, I’m going to put it in this account. And then we just kind of forget it. You know, you get a statement every year that tells you what you’ve made on that, but it wasn’t put in with the intention of turning around and taking it out. So really at the end of the day, it’s really your decision, but if you’re kind of curious about this and see how it would have applied to you, you can certainly reach out to me at FinancialProf.Org. and we can have that conversation to see if if an annuity makes sense. So until next time, make it a great day.”
