Someone said to me recently: "Why would I put money in an annuity when I can do better in the stock market?" Fair question. And they might be right — over a long enough timeline, the stock market has historically outperformed most annuity crediting rates. But an annuity isn't trying to compete with the stock market. It's solving a different problem entirely.
The stock market's job is growth. An annuity's job is to make sure a specific amount of money shows up every month regardless of what the market did that year. Comparing their returns is like comparing a truck to a sports car. They aren't built for the same road.
Where this matters most.
Imagine you retire with $600,000 and the market drops 30% in year one. You still need to withdraw for living expenses, so you sell when prices are down. Now the portfolio has to climb more than 50% just to get back to even — while you keep withdrawing. That's sequence-of-returns risk, and it's the single biggest threat to a retirement that's funded entirely by the market.
The two-bucket answer.
Most of the people I work with don't move everything. They set aside the portion that has to cover essentials — housing, healthcare, food — in something with a floor, and they leave the rest fully invested for growth. When a bad year hits, they don't have to sell anything. The portfolio gets time to recover.
So yes, you may well do better in the market with your growth money. I'd encourage it. The question is which dollars you can afford to have in the market when the next bad year arrives.
If you'd like to see what that split could look like with your numbers, that's a 15-minute conversation.
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Author of Indexed Annuity Secrets and founder of Pacific Ridgeway Insurance Solutions in San Diego. Navy veteran. Licensed financial professional, CA #4132743.
Fixed indexed annuities are insurance products, not investments. Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. This article is for educational purposes only and is not financial, investment, tax, or insurance advice.