Annuities vs. stocks: Which fits your retirement strategy?

After decades of working and saving, the finish line is finally in sight. It’s time to retire. And as you transition from building wealth to living off it, your financial priorities naturally shift.

This period of change often sparks a familiar financial debate among retirees and investors: annuities versus stocks. Despite the seeming divide, the good news is that you don’t have to choose between them. They’re two distinct financial tools that serve different purposes within a comprehensive retirement strategy, much like the relationship between saving and investing.

Stocks offer long-term growth potential, often alongside regular dividend income, but they can come with considerable risk. On the other hand, fixed and indexed annuities can provide principal protection and guaranteed income, helping ensure you won’t outlive your savings.

This guide addresses the pros and cons of annuities and stocks and shows how a thoughtful, balanced approach that includes Gainbridge annuities can help create a more resilient retirement portfolio.

Annuity vs. dividend stocks: Weighing risk, fees and taxes

While there's no one best way to save for retirement, some retirees may benefit from a mix of annuities and dividend stocks. Here are a few key considerations for making both part of your retirement strategy.

Risk and reward

Stocks can deliver higher returns, but they come with higher risk. Income from dividend stocks isn’t predictable or guaranteed. It can fluctuate over time and, if the company faces financial trouble, disappear altogether. Plus, if a dividend-paying stock decreases in value, you could lose a significant portion of your investment, whether on paper or when you sell the stock. 

Annuities, particularly fixed annuities from trusted providers like Gainbridge, offer steady interest rates and predictable retirement income regardless of stock market performance. 

Fees and costs

Stocks sometimes come with fees. While no- or low-commission stock trading has become commonplace, some brokerages still charge for certain trades. If you invest through exchange-traded funds (ETFs), you’ll also pay an expense ratio, which covers the ETF’s operating costs.

Some annuities include charges for administrative costs, early withdrawals, or optional riders that add features for an extra fee. It’s all about finding the right provider: Gainbridge’s digital-first annuities, for instance, have no hidden fees or commissions. 

It’s also worth noting how annuities compare to bonds. While bonds can provide reliable income and moderate growth, annuities come with features that bonds don’t, such as tax-deferred growth, guaranteed income for life, and comparatively little or no sensitivity to interest rates once issued. 

Tax treatment

In taxable accounts, the Internal Revenue Service (IRS) taxes qualified dividends at favorable capital gains rates. If you hold dividend stocks within an IRA, their tax treatment depends on whether the account is traditional or Roth.

As with retirement accounts, deferred annuities grow tax-deferred, so you don’t pay taxes until you start taking withdrawals in retirement. The IRS taxes the earnings portion of annuity withdrawals as ordinary income if purchased with after tax money. If purchased with pre-tax money, the entire withdrawal amount is taxed as ordinary income. 

Do annuities pay dividends? Clarifying returns

Annuities do not pay dividends the way some stocks do. Generally, the point of an annuity is to turn your initial premium (a lump sum or series of payments) into a reliable income stream. They grow in other ways:

• Fixed annuities provide a guaranteed interest rate over a fixed timeframe. 
• Indexed annuities offer market linked interest growth,— typically tracking an index like the S&P 500 — but with downside protection. 
• Variable annuities invest in sub-accounts that can increase or decrease in value, functioning like mutual funds within an annuity. 

Other annuities often include attractive growth features; however, when it comes to retirement the goal is typically not to lose money but to maximize retirement income. 

Annuity vs. brokerage account: Liquidity and flexibility

Another important difference between annuities and stocks is how and when you can access your savings. 

Often, investors hold stocks in brokerage accounts, which can provide convenient and relatively quick access to funds. You can sell a stock or ETF today and typically receive that money in your bank account within a few days. You can even elect to have your dividend payments delivered as cash or automatically reinvested into new shares of stock. 

Annuities generally offer less flexibility than brokerage accounts. Some have surrender charges for early withdrawals and place other restrictions on tapping your nest egg. 

That said, some modern annuities — like those offered by Gainbridge — include flexible withdrawal features and clearly defined terms to help mitigate these concerns. For example, you may be able to withdraw a portion of your balance annually without penalties, depending on the contract. Remember to review your contract carefully as withdrawing more than allowed can result in fees or surrender charges. 

As with brokerage accounts, the key is knowing how and when you’ll need access to funds. A typical financial strategy should include both liquid assets and stable income sources, so you’re never forced to sell during a downturn or withdraw early from a product with penalties.

Fixed Annuities can provide a strong foundation as part of a comprehensive retirement strategy. They’re designed to preserve your money until you need it and provide predictable income afterward, even if the economy and stock market are performing poorly. 

Many investors and retirees use both: stocks for more aggressive growth and annuities to guarantee essential income and reduce the risk of outliving their savings. 

Combining annuities and stocks: Diversify risk

Stocks can provide long-term growth, making them better suited for funds you don’t need to touch right away. 

Fixed Annuities tend to offer more peace of mind, thanks to guaranteed income and the assurance that the savings you allocate to them won’t be exposed to the ups and downs of a volatile stock market. 

Many investors employ a “three-bucket” strategy, where the first bucket is made up of savings and annuities to cover fixed and immediate expenses. The middle or second bucket is used to replenish the first bucket and is made up with low risk and moderate growth assets. Deferred annuities, CDs and bonds may make up this bucket. While the third bucket is made up of longer-term assets such as stocks for growth potential. The 3 bucket system can help create a comprehension retirement strategy. 

To get an idea of how an annuity can play its part in your retirement plan, use Gainbridge’s annuity calculator to model scenarios.

Annuity vs. stock market: Which one wins?

It’s not a question of whether annuities are better than stocks, it’s about whether annuities or stocks work better for you — and when.

If you like the idea of earning dividend income and are comfortable taking on more risk in pursuit of higher potential returns, stocks may be a good fit for you. If your priority is protecting your money from stock market volatility, achieving tax-deferred growth, and ensuring steady income in retirement, purchasing a fixed annuity can make more sense.

Still, the reality is that many investors own both stocks — dividend stocks or not — and annuities. That’s what makes a long-term retirement plan comprehensive and resilient enough to weather different market conditions while taking advantage of opportunities they create. With the right mix of annuities and stocks, you can enjoy stable income and long-term growth without putting your retirement savings at risk. 

Invest smarter with guaranteed growth

If you’re ready to lock in guaranteed interest rates and reduce portfolio stress, explore the Gainbridge SteadyPace™ multi-year guaranteed tax-deferred annuity. Unlike a certificate of deposit, which is designed for short-term saving, SteadyPace^TM helps you grow your money over the long term on a tax-deferred basis.

Explore all of Gainbridge’s digital-first annuities today.

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This article is intended for informational purposes only. It is not intended to provide, and should not be interpreted as, individualized investment, legal, or tax advice. For advice concerning your own situation please contact the appropriate professional. The GainbridgeⓇ digital platform provides informational and educational resources intended only for self-directed purposes. Guarantees are backed by the financial strength and claims-paying ability of the issuer.

Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. Withdrawals of taxable amounts are subject to ordinary income tax and if made before age 59½, may be subject to a 10% federal income tax penalty. 

Distributions of taxable amounts from a nonqualified annuity may also be subject to an additional 3.8% federal tax on net investment income. CDs are deposit accounts offered by banks and credit unions, insured by the FDIC or NCUA. Annuities, on the other hand, are an insurance product offered by an insurance company and are not FDIC or NCUA insured.

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