The debate around annuities and if they are a good investment choice has been going strong for years and doesn't seem like it will cease anytime soon. But instead of rehashing the usual arguments, let's look at it from a different perspective.
If you are currentlyplanningfor retirement and are looking for the right financial instrument to achieve the best growth and income results, you are better off using a dividend stock investing approach rather than use annuities.
Dividend Growth Prospects
When you set up an annuity, the upside on your portfolio becomes very limited. Depending on what type of annuity you choose, you have either no growth on an immediate annuity or minimal growth due to fees on other types of annuities. With a dividend stock portfolio, not only do you get income from the dividend, but you get the capital gains from the stocks' price growth.
The downside of growth with dividend stocks is that you will take on more volatilitybecause there is no guarantee. As long as you are not selling your stock when the market goes down and are only living off of the dividends, this isn't a big issue.
On the other hand, if this factor would keep you up at night, guarantees that come with annuities may be worth the growth trade-off for you. Just remember that annuities are an insurance policy, so they're only as good as the company you buy them from. If the firm goes out of business, you're out the money.
Taxes Stack-Up
When looking at taxes, there are two major differences between the two options. The first is how your earnings are taxed; the second is the cost basis for your heirs if you pass on the asset to them after death.
With the taxes that you pay on your earnings in an annuity, you are taxed at your ordinary-income rate. However, with dividend stocks, you pay a lower rate on the qualified dividends—and if you are in the lowest two tax brackets, you don't pay any taxes. Additionally, if you sell your stock for a gain, the capital gains tax tops out at 20% for the highest tax bracket. This can make a big difference in the taxes you pay during retirement.
When you pass on assets to your estate, there are different rules for what your heirs' cost basis becomes. With an annuity, they get the same basis that you had. With stocks, they get what is called step-up basis—this means that their cost basis is what the price of the stock was of the asset on the day you died. This can make a major difference in how much they eventually get taxed even if you had a 100% gain on the stock. If they sold it for the new basis, they would owe no capital gains tax.
How the Fees Add Up
Fees can destroy the growth potential of a portfolio. They make it harder to reach your goals because you have to not only make the return you need to achieve your goals, but you have to also make back the fees that you pay for the investment.
Having a dividend stock portfolio is one of the cheapest ways to own an asset. You pay a transaction fee to purchase the shares and then don't have to pay any other fees until you sell the stock. At most brokerages, you can even reinvest the dividends at no additional cost. If you structure your investments so that you eventually live off the dividends and don't sell the stock, then you only pay one fee.
Annuities, on the other hand, are full of fees. Not only do you have large commissions up front, but you are also subject to surrender charges if you want to get out of the contract, fund expense chargesand many more.
The Bottom Line
Annuities are an expensive way to prepare for retirement. Using dividend stocks will see a minimization in fees and taxes, and you still get the growth and income that you'll need for your non-working years.
SPIAs. Fixed annuities are the classic type of annuity. You fund your annuity. Then it grows at a fixed interest rate. Then you can annuitize it and start receiving your income.
are a fantastic way to build out the more conservative side of your portfolio. Dividend-paying stocks can be a good choice for the more moderate and high-risk side. Fixed annuities provide stability and certainty, whereas stocks can be volitile with a potential for large earnings.
Annuities are an expensive way to prepare for retirement. Using dividend stocks will see a minimization in fees and taxes, and you still get the growth and income that you'll need for your non-working years.
Dividends are particularly valuable in retirement because they provide a consistent stream of income that can help cover living expenses. And, unlike bonds, dividend stocks offer the potential for capital gains as well as income. That means your portfolio can continue to grow even as you withdraw money from it.
Despite their storied histories, they cut their dividends. 9 In other words, dividends are not guaranteed and are subject to macroeconomic and company-specific risks. Another downside to dividend-paying stocks is that companies that pay dividends are not usually high-growth leaders.
Yes, some annuities are safe in a recession. Some annuities are even securities. Fixed annuities provide guaranteed rates of return, which means that you know exactly how much you can earn at the end of the term.
Bonds are issued for terms as short as three months or as long as 30 years (and sometimes even longer). An investor who thinks bond rates may go up soon can buy a short-term bond and then reinvest the principal later, when rates may be better. Bonds generally earn higher yields than annuities.
Annuities are considered poor investments for many reasons. Depending on the annuity, these include a variety of high fees, with little to no interest earned, an inability to keep up with inflation, and limited liquidity.
Annuities can be a bad choice for some people—they have higher fees and less flexibility than some savings options. And depending on the type you choose, your heirs may get nothing after you die even if far less was paid out than you had contributed. but for others they are a great option to help save for retirement.
Those aged 50 to 70 are typically best positioned to buy annuities, but the reasons to do so vary by age group. Legally, you must be 18 to buy an annuity. Many annuity providers set their own minimum age limit of 50 and maximum of somewhere between 75 and 95 years old.
However, one of the "ingredients" to Berkshire Hathaway's success that doesn't receive enough credit is Buffett's love for dividend stocks. Companies that pay a regular dividend to their shareholders tend to be recurringly profitable, time-tested, and are capable of providing transparent long-term growth outlooks.
Coca-Cola boasts a history of steady dividends and shareholder returns, making it appealing for retirement investors seeking a stable income stream. Its strong cash flow generation coupled with disciplined capital allocation further solidifies its status as a top safe retirement stock.
As you pass through your 40s, you can gradually increase your holdings of high-dividend stocks and cut back on the riskier, more volatile growth investments. By the time you hit 50, around half your growth stocks should have been replaced by more stable dividend-payers.
“One mistake to avoid,” Cabacungan says, “is to buy a company's stock simply because it issues a high dividend.” If the company has leveraged excessive debt to fund the dividend, it could come at the expense of future profitability and hurt growth prospects.
A dividend trap is where the stock's dividend and price decrease over time due to high payout ratios, high levels of debt, or the difference between profits and cash. These situations commonly produce an unsupported but attractive yield.
Depending on how much money you have in those stocks or funds, their growth over time, and how much you reinvest your dividends, you could be generating enough money to live off of each year, without having any other retirement plan.
If you are looking to create wealth and have a longer time horizon, staying invested in growth will enable you to enjoy longer returns. But if you are looking for a more immediate return and steady cash flow, dividend investing could be the best choice for you.
Wrapping it up, diving into monthly dividend REITs like STAG, Whitestone, and Agree Realty is like finding a steady stream of income that keeps on giving. These gems not only toss a regular paycheck your way, but also off the potential for solid earnings growth from here.
Dividends are paid per share of stock, so the more shares you own, the higher your payout. Opportunity: Since the income from the stocks isn't related to any activity other than the initial financial investment, owning dividend-yielding stocks can be one of the most passive forms of making money.
Interest from money markets, bank CDs, and bonds is taxed at ordinary tax rates. That means a person in the top tax bracket pays taxes on interest payments up to 37%. If you compare that to the maximum 23.8 % tax on qualified dividends, the "after-tax" returns are significantly better with dividends.
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