Growth vs Stability: an Important Guide to Annuity Retirement Income

A common source of frustration for retirees as they secure retirement income with annuities come out of misplaced expectations. Some expect growth like investing in the stock market, others get anxious about not getting a stable, predictable income stream.

The truth is, the disappointment with annuities is not because of some inherent flaw with the product, but how the product itself is designed to work. Annuities were never designed to outgrow the stock market, and the stock market was never designed to guarantee you income to begin with.

For a better understanding, it’s good to start by reviewing the history and purpose of annuities:

The History of Annuities & Understanding their Purpose

First, annuities are not a trendy modern invention. In fact, they date back to ancient Rome, where they were created with a singular objective: to provide a steady, guaranteed stream of lifetime income for soldiers and retirees.

Annuities were designed to pool risk and eliminate the fear of outliving one’s savings (longevity risk). They were never designed to maximize capital gains or create multi-generational wealth. They were designed for predictable, reliable cash flow.

In recent times, financial institutions began aggressively marketing annuities- particularly variable and indexed annuity products- as vehicles for wealth accumulation. Consumers were misled to believe they got the best of both worlds: stock market-like growth and downside protection.

The Problem with Using Annuities for Growth

When you try to use an annuity for wealth accumulation, you quickly run into some roadblocks that any decent advisor should point out well in advance. The problem is that the features that make annuities great for securing income are actually a drag on growth.

Here are the main problems with “growth” annuities:

Caps, Spreads, & Participation Rates

Any market-linked annuities restrict your upside. If the S&P 500 jumps 20%, your annuity might cap your return at 6% or 8%. You are banking on the complexities of the market without enjoying its full rewards.

The Fee Drag

Growth-marketed annuities often come packed with administrative fees, mortality and expense (M&E) risk charges, and expensive underlying fund fees. Add an income or death benefit rider, and your annual fees can quietly chew up a significant portion of your returns.

The Liquidity Lock

True wealth growth requires flexibility, yet many annuities come with stringent surrender charges lasting 10 to 20 years. If a better investment opportunity comes by, your capital is effectively locked behind a penalty wall.

The Source of Confusion

Direct equities, low-cost ETFs, mutual funds, and real estate will almost always outperform a "growth" annuity over the long term, with far lower fees and total liquidity. These assets can also come with volatility and uncertainty.

One of the biggest misconceptions in retirement planning is the idea that every financial product should accomplish every objective equally well. In reality, different financial products are designed for different purposes.

Income-focused annuities, on the other hand, are designed to create predictable cash flow and reduce financial risk, creating an income stream that retirees cannot outlive. That distinction matters because many retirees are upset when their annuities don’t accumulate wealth when that’s just not what they’re meant to do.

A Hybrid Portfolio, for Both Growth & Security 

The good news is, retirement planning doesn’t have to be a matter of choosing between annuities or the stock market. For retirees who are serious about accumulating wealth, annuities work very well with investment options, as long as you have the correct proportion. 

A “hybrid” approach involves a two-sided strategy, each side with its own important function and both working together:

The Annuity, Your Secure Income Safety Net

Your annuity does what they were always good at doing: generate a guaranteed lifetime income stream for your retirement. Using your annuity to cover your baseline, essential living expenses, such as housing, healthcare, and food are covered, giving you total peace of mind.

The Investments, for Inflation-Busting Growth

Because your basic needs are completely covered by your guaranteed annuity income, you no longer need to panic about what happens in the market. You can confidently leave the remainder of your wealth in equities, ETFs, and real estate to aggressively fight inflation and compound over time. 

In fact, from a psychological perspective you may even make better investment decisions. By reducing the emotional weight attached to the outcome of your investments, you can think more clearly to avoid panic selling, overly conservative positioning, or abandoning long-term investment strategies at the worst possible times.

Elevate Your Retirement Plan with Annuity Laddering

If you want to optimize your retirement income further, you can switch out a single annuity and opt for an annuity laddering strategy.

Think of laddering as a time-segmented income strategy. Instead of putting all your income assets into a one-time lump sum product, you purchase a series of smaller income annuities with staggered start dates. One contract triggers immediate income today, another is scheduled to activate in five years, a third kicks in ten years down the road, and so on.

This laddering approach does three things a single annuity doesn’t:

• Create a naturally increasing income stream over time.

• Allows future layers of income to lock in potentially higher payout rates as you age.

• Keeps a larger portion of your portfolio liquid and growth-oriented in the early years of retirement.

The Truth (About Annuities) Will Set You Free

If you signed on for an annuity looking for big returns down the road, then reading all of this might come with some bitter realizations. 

On the upside, in the right hands and with the right mindset, annuities and a laddering strategy can help secure your retirement income while giving you the freedom to invest as you well and expand on the wealth you worked so hard to save, minus fretting over the market.

Book a strategy session with National Annuity Educators, and learn how to untap the potential of a portfolio with laddering and smart investing combined.