Annuity vs. Investment Portfolio: Are We Asking the Wrong Question? 

“Would I make more money investing this instead?” 

It’s a fair question when considering an annuity vs. an investment portfolio, but returns only tell part of the story. Comparing an annuity with an investment portfolio based solely on performance is a little like comparing a paycheck with a savings account. Both involve money, but they may serve different purposes. 

As you approach retirement, the better question may be: What job does each portion of my money need to do? 

Growth matters, but your assets may also need to provide income, remain accessible, help manage certain retirement risks, and support your legacy goals. Looking at those needs first can provide a better framework for deciding where investments and annuities may fit within your retirement income planning. 

Annuity vs. Investment Portfolio: Why Returns Don’t Tell the Whole Story 

When comparing an annuity with an investment portfolio, it’s easy to focus on one question: Which one could earn more? But in retirement, the highest potential return isn’t always the only objective. 

An investment portfolio may offer: 

• Long-term growth potential 

• Flexibility and access to your money 

• Control over how assets are invested 

Certain annuities may offer: 

• Contractual retirement income 

• Features designed to address longevity risk 

• Different levels of market exposure, depending on the annuity 

The tradeoffs matter, too. Annuities can come with fees, surrender periods, surrender charges, withdrawal restrictions, and other limitations. 

Not All Annuities Work the Same Way 

“Annuity” describes a broad category of products. Fixed, variable, and indexed annuities can differ significantly in how they generate returns, what they cost, how accessible your money is, and what guarantees they provide. 

That’s why comparing returns alone can miss the bigger question: What do you need this money to accomplish as part of your retirement income strategy? 

Not sure what to believe about annuities? Download The Annuity Reality Check to learn how different annuities work, common misconceptions to watch for, and questions to consider before deciding whether one may fit into your retirement strategy. 

Start With the Job Your Money Needs to Do 

Not every dollar in retirement needs to do the same thing. Instead of asking all your assets to produce the highest return, consider the job each portion of your money needs to perform: 

• Growth: Keep a portion invested for long-term growth and to help offset the effects of inflation over a retirement that could last decades. 

• Income: Turn savings into cash flow by coordinating Social Security, pensions, portfolio withdrawals, and certain annuities. 

• Liquidity: Maintain accessible assets and cash reserves for healthcare costs, home repairs, family needs, or changing plans. Keep in mind that some annuities may limit withdrawals or impose surrender charges. 

• Legacy: Consider which assets you expect to spend during your lifetime and which you hope to leave to family or charitable causes. 

Different dollars can have different jobs. Defining those jobs can make it easier to evaluate where investments, annuities, and other financial tools may fit within your broader retirement plan. 

Where an Investment Portfolio May Fit in Retirement 

Retirement doesn’t mean your portfolio stops working. Keeping money invested can provide continued growth potential while giving you flexibility over how and when you access your assets. 

An investment portfolio may play several roles in retirement: 

• Long-term growth: Invested assets can continue participating in the market throughout a retirement that may last decades. 

• Flexibility and liquidity: Unlike assets with withdrawal restrictions, many investments can be accessed or repositioned as your needs change. 

• Asset allocation: Your mix of stocks, bonds, cash, and other investments can evolve as your income needs and risk tolerance change. 

• Legacy planning: Investments you don’t need for retirement spending may eventually become part of the wealth you pass on. 

The challenge is that portfolio withdrawals can change the impact of market volatility. 

At 45, a market decline may be uncomfortable, but you may still be earning a paycheck and contributing to your accounts. At 70, that same decline can happen while you’re withdrawing money to pay your bills. Selling investments after they have fallen can leave fewer assets available to participate in a future recovery, a concept known as sequence-of-returns risk. 

This doesn’t mean you should stop investing when you retire. It means your retirement investment portfolio needs to be considered alongside your income needs and how much market risk you can reasonably take while drawing from it. 

Where an Annuity May Fit in Retirement 

Rather than asking whether an annuity should replace your investments, consider a different question: What problem would an annuity solve in your retirement plan? 

Certain annuities may be used to create contractual retirement income or shift specific financial risks to an insurance company. Depending on your situation, that could mean addressing: 

• Longevity: Creating income that can continue for life, depending on the contract and options selected. 

• Income needs: Helping cover recurring expenses alongside Social Security, pensions, and other income sources. 

• Market exposure: Certain annuities may provide income or principal protections that are not directly tied to day-to-day market performance. 

Those benefits come with tradeoffs. Depending on the annuity, you may encounter fees, surrender periods, withdrawal restrictions, caps, participation rates, or other limitations. Guarantees are also subject to the claims-paying ability of the issuing insurance company. 

That’s why an annuity doesn’t necessarily need to replace an investment portfolio. It may be more useful to think of it as a tool for solving a specific retirement income or risk-management need while other assets continue doing different jobs. 

Case Study: When “Which One Earns More?” Becomes the Wrong Question 

This example reflects a client experience. The client was not compensated for sharing it. The experience is not representative of all clients, and results are not guaranteed and will vary based on individual circumstances. 

Consider Jacob and Sarah, both 64, with a $2 million portfolio as they prepare to retire. 

When presented with an annuity, their first question is understandable: Why move money out of our portfolio if it has greater growth potential? 

But their retirement plan reveals a different concern. After Social Security, they still have a retirement income gap between their dependable monthly income and essential expenses. They also don’t want to rely heavily on selling investments during a market downturn. 

Instead of comparing returns, they give different portions of their money different jobs. They could consider using a portion for an appropriate income solution while keeping the rest invested for growth, liquidity, and legacy goals. 

The question is no longer “Which one earns more?” It becomes “What do we need this money to accomplish?” 

The Retirement Risks Each Approach Handles Differently 

Instead of building a traditional pros-and-cons list, it can be more useful to ask how each approach responds to the risks you may actually face in retirement. 

• Longevity risk: A portfolio offers continued growth potential, but withdrawals depend on how long your assets last. Certain annuities can provide income for life, depending on the contract and options selected. 

• Sequence-of-returns risk: Market declines early in retirement can put added pressure on a portfolio when you are also taking withdrawals. Certain annuity income may be less dependent on short-term market performance. 

• Inflation risk: Investments may provide greater opportunity for long-term growth, while some annuity income may not increase enough to keep pace with rising costs. 

• Liquidity risk: Investment accounts generally provide greater access to your assets. Annuities may have surrender periods, withdrawal limits, or other restrictions that make access more limited. 

• Legacy considerations: Investment assets can often remain available for heirs, while what beneficiaries receive from an annuity depends on the contract, death benefit, and payout options selected. 

No single financial tool handles every retirement risk equally well. Greater income predictability may mean giving up some liquidity, while greater growth potential may mean accepting more market exposure. The goal is to understand which tradeoffs make sense for the retirement you’re planning. 

Could an Annuity and Investment Portfolio Work Together? 

Retirement planning doesn’t have to come down to choosing one over the other. In some cases, the better approach may be deciding how an annuity and investment portfolio can work together. 

For example, if Social Security and a pension already cover most of your essential expenses, you may have less need for additional predictable income. If there’s a larger gap between dependable income and monthly spending, you might consider whether an annuity could help fill part of that retirement income gap. 

Your investment portfolio can then continue serving other needs, such as pursuing long-term growth, maintaining liquidity, funding discretionary spending, and supporting legacy goals. 

The right mix depends on what you already have and what you need your money to do. The goal isn’t to make annuities and investments compete. It’s to determine whether each has a useful role in your broader retirement plan. 

Annuities are often presented as something you either love or hate, but there’s much more to consider. Download The Annuity Reality Check to learn what different annuities are designed to do, where the tradeoffs are, and what questions to ask before deciding whether one belongs in your financial plan. 

6 Questions to Ask Before Choosing Either Approach 

Before deciding where an annuity or investment portfolio may fit, step back from the products and look at your retirement plan as a whole. Ask yourself: 

1. How much of my spending is already covered? Consider Social Security, pensions, and other predictable income sources. 

2. How much liquidity do I want? Think about how much money you want readily available for planned and unexpected expenses. 

3. What happens if markets fall early in retirement? Consider how a significant downturn could affect your withdrawals and long-term plan. 

4. How important is leaving assets to heirs? Your legacy goals can influence how you structure and use your assets. 

5. How much growth do I still need? Retirement may last decades, so consider the role your investments need to play over time. 

6. What problem would an annuity solve? If you can’t clearly identify the need it would address, it may be worth asking more questions before moving forward. 

Ultimately, evaluate the retirement income plan before evaluating the product. Understanding what you need your money to accomplish can make the annuity vs. investment portfolio decision much clearer. 

Conclusion 

Want to take a closer look at annuities? Download The Annuity Reality Check for a practical look at how different annuities work, their potential tradeoffs, and questions to ask before deciding whether one may fit into your plan. 

If you’re approaching retirement and wondering how your investments, Social Security, retirement accounts, annuities, and other assets could work together, connect with the Liberty Group team. We can help you evaluate your retirement income planning, tax considerations, liquidity needs, growth goals, and broader financial picture to explore strategies based on your goals, needs, and financial situation. 

Standard Disclosure 

This blog expresses the author’s views as of the date indicated, are subject to change without notice, and may not be updated.  The information contained within is believed to be from reliable sources.  However, its accurateness, completeness, and the opinions based thereon by the author are not guaranteed – no responsibility is assumed for omissions or errors.  This blog aims to expose you to ideas and financial vehicles that may help you work towards your financial goals. No promises or guarantees are made that you will accomplish such goals.  

Past performance is no guarantee of future results, and any expected returns or hypothetical projections may not reflect actual future performance or outcomes. All investments involve risk and may lose money. Nothing in this document should be construed as investment, tax, financial, accounting, or legal advice. Each prospective investor must evaluate and investigate any investments considered or any investment strategies or recommendations described herein (including the risks and merits thereof), seek professional advice for their particular circumstances, and inform themselves about the tax or other consequences of any investments or services considered.   

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