Five Reasons a Brokerage Account Might Be Better Than an Annuity for Your Investments, #260

I’m exploring a common dilemma for anyone coming into a lump sum of money, whether from an inheritance, the sale of a business, or another windfall: Should you invest in a traditional brokerage account or opt for an annuity?

On this week's episode, I discuss the key differences between annuities and brokerage accounts, highlighting the five major pitfalls of annuities that are often overlooked.

You'll learn why transparency, flexibility, and tax efficiency make brokerage accounts a better fit for many investors, especially those seeking to beat inflation and maintain control of their funds.

You will want to hear this episode if you are interested in...

• [06:12] Annuities have capped returns and may not keep up with inflation, making brokerage accounts a better investment for retirees.
• [07:59] Fixed annuities vs. inflation risks.
• [11:21] Brokerage accounts offer easy, penalty-free liquidity for investment withdrawal.
• [14:56] Brokerage accounts offer tax advantages, such as zero percent tax on long-term investments and flexibility to access funds at any age.
• [19:55] Traditional brokerage accounts offer transparency, ease of understanding, and no hidden fees, providing clear valuations and peace of mind.
• [20:54] Potential conflicts of interest associated with high commissions given to advisors who sell annuities.

Understanding the Five Key Advantages of Brokerage Accounts for Lump Sum Investors

Inflation Protection

A primary concern for retirees is ensuring their income grows at least as fast as inflation. Fixed annuities, which guarantee a steady interest rate, sound appealing in their promise of stability, but these tend to pay rates (typically 4-6% as of now) that may barely keep pace with rising costs. If inflation spikes, the real value of your money could erode.

Contrast this with long-term investing via a brokerage account. If you were to invest in a broad index fund tracking, say, the S&P 500, you’d historically average about a 10% annual return since 1957.

Even accounting for average inflation (let’s say 3%), you’re left with a meaningful net gain. Over decades, this growth can make a significant difference, allowing your income and nest egg to grow, not just hold steady.

Easy Access to Your Money

Life is unpredictable. You might need to access your savings for a sudden expense, a home repair, a medical event, or a business opportunity. With annuities, most contracts enforce a “surrender period” during which you’ll pay penalties (sometimes starting at 7% and declining over many years) for early withdrawals above a limited free amount (typically 10% per year). Paperwork and delays are another downside.

Brokerage accounts, on the other hand, offer quick and penalty-free access. Whether you need all or just part of your funds, they’re typically available within a couple of business days. You’ll pay taxes on any gains, sure, but you’ll sidestep surrender charges and bureaucratic hurdles. 

Potentially Lower Taxes With Brokerage Accounts

Tax treatment is often overlooked but can have a big impact on your bottom line. Annuitized payouts and withdrawals from annuities are taxed at ordinary income rates, with gains coming out first (LIFO: last in, first out).

That can mean higher taxes for many, especially if you’re in a modest or high tax bracket. With a brokerage account, long-term investment gains are generally taxed at lower capital gains rates (15% for most, and sometimes 0% for those in the lower brackets).

Plus, if you inherit a brokerage account, most investments receive a “step up” in basis, the new tax cost becomes the value at the decedent’s death, potentially eliminating decades of capital gains tax if sold immediately.

Simplicity and Transparency

Annuities come with layers of complexity, including various types (fixed, indexed, and variable), confusing rider add-ons, differing fees, and ever-changing product features. Even professionals can struggle to keep up!

Brokerage accounts, by contrast, are simple and transparent. You get a clear statement showing exactly what you own, its value, and the associated fees, which are commonly lower than those inside annuity products. No hidden surrender charges or high ongoing costs.

Avoiding Aggressive Sales Tactics and Conflicts of Interest

Annuities are lucrative for the agents who sell them, with commissions sometimes soaring to 7%. This can create an inherent conflict of interest, particularly for seniors who might feel pressured into buying.

Choosing a low-fee brokerage account, especially with the guidance of a fiduciary, fee-only financial advisor, can help you avoid these conflicts. You retain control, minimize costs, and benefit from unbiased advice.

Annuities do have a place for certain ultra-conservative investors who value guarantees above all else. However, for most people, especially those seeking growth, flexibility, and transparency, a brokerage account is often the safer and smarter long-term choice.

If you’re unsure about your unique situation, consider consulting a fee-only advisor who will put your interests first and steer clear of high-commission sales pitches.

Resources Mentioned

• Retirement Readiness Review
• Subscribe to the Retire with Ryan YouTube Channel
• Download my entire book for FREE 

Connect With Morrissey Wealth Management 

www.MorrisseyWealthManagement.com/contact

 

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