Annuity Investment Advice

When considering any type of investment it should be placed in the context of an overall investment strategy based on your financial profile. Annuities, especially, need to be viewed as a component of an asset allocation that includes a mix of investments that can provide the greatest amount of diversification and balance in order to reduce risk and produce stable returns. Only then can you determine whether any investment choice is suitable for your situation.

When viewed in this way, annuities need to be considered for the role they can play in the overall investment strategy and how they help maintain the balance in a portfolio while enhancing its return or reducing its risk. They have certain investment characteristics that need to matched your own investment preferences, tax situation, tolerance for risk and your need for liquidity.

Defining Your Investment Objectives and Financial Profile

Before any investment product can be evaluated for suitability, you need to have your investment objectives clearly defined with quantifiable benchmarks. This includes defining the goal, how much needs to be accumulated, and the time horizon. With that, you can calculate what kind of return you will need to achieve in order to meet your objectives. Aggressive goals with shorter time horizons will require a higher rate of return commensurate with a higher level of risk. Long-term goals may require a lower return and less risk. It is important to prioritize your objectives because it’s not always possible to achieve all of them. You will need to focus on your most essential objectives until you have the capacity to include more objectives in your plan.

Next, you need to apply your particular investment preferences and risk tolerance. The younger you are, the more risk you may be able to tolerate. You have the value of time to help you smooth out the ups and downs of the market. If you’re older, you may not have as long a time horizon, therefore, you may not be able to tolerate as much fluctuation in your portfolio value. In all cases, it is important to weigh your tolerance for all kinds of risk. You may not like market risk, but if you don’t have any exposure to the stock market your portfolio returns may not be able to counter the risk of inflation. You may prefer fixed income investment or bonds over stocks, but you then have to deal with interest rate risk. The best way to minimize risk is to seek a balance in your assets that will act as counter weights to all types of risk.

Next, you need to consider your tax situation and your need for liquidity. If you are in the higher tax brackets, you can benefit from tax advantaged investments. And, if you sufficient liquidity, that is asset that can be converted to cash without risk to their value, you can afford longer term investments that may require a minimum holding period, but offer greater potential for returns, such as real estate or variable annuities.

Annuities as part of Asset Allocation

Annuities can play several roles in asset allocation by increasing diversification, adding balance, lowering taxes, or adding stability. Here are a few ways annuities add value to an allocation:

Fixed Annuities:

For portfolios heavily weighted in stocks with widely fluctuating returns, fixed or indexed annuities can stabilize the portfolio so that, in periods when the markets are declining, the portfolio is still earning a return. And, if the portfolio is heavily taxed, annuities can reduce the portfolio’s exposure to taxes.

Variable Annuities:

For portfolios that lean towards fixed investment of interest-bearing investments, variable annuities can add a much needed boost in returns without substantially increasing the total risk exposure of the portfolio. Although they are considered to be an equities investment, many variable annuities today offer downside protections in the form of guaranteed death benefits, minimum guaranteed rates of return and account reset features.

Immediate Annuities:

For portfolios generating income, immediate annuities, with their fixed guaranteed income streams, can add stability allowing for the portfolio to maintain some exposure to stocks and other investments that can produce increasing amounts of income, but that are subject to market fluctuations.

Liquidity Needs

In all cases, the need for portfolio liquidity needs to be considered. Annuities are viewed as long-term investments, and, although they have fairly flexible withdrawal provisions, their benefits can only be maximized through a long holding period. Unless, you have a sizable portion of your assets invested in cash and cash equivalents, you may want to hold off on investing in an annuity. Also, you need to be mindful that annuity withdrawals are taxed as ordinary income rates. The longer you can defer withdrawals, the more the tax deferred growth of annuity will benefit your portfolio. Withdrawals made prior to age 59 1/2 may be penalized by the IRS, so you need to consider your current age when evaluating an annuity investment.

If you annuitize an annuity, converting it into a stream of income guaranteed by the life insurer, you give up your rights to your principal. So, it would be important to have sufficient liquidity among the other assets in your portfolio.


There is no one investment vehicle that is suitable for everyone. But, when placed in the context of an overall asset allocation strategy, many investments can play a vital role in adding diversification, balance, tax efficiency, or stability which is the way to ensure steady, consistent returns over the long term. Annuities, with their guarantees and tax advantages can play a unique role in asset allocation. It is important to evaluate annuities not as a standalone investment, but, rather as a component of your overall strategy. In order to do that, you will need to have a clear understanding of your investment objectives and your personal financial profile.