Dividend stocks or retirement annuities?

The debate over annuities and whether they are a good investment option has been fierce for many years, and it does not seem to stop anytime soon. However, rather than repeating the usual argument, it is better to look at it from a different perspective.

If you are currently planning to retire and are looking for the right financial tools to achieve the best growth and income results, then you are better off using dividend stock investment methods instead of using annuities.

Dividend growth prospects

When you set up an annuity, the advantages of your portfolio become very limited. Depending on the type of annuity you choose, your direct annuity has not increased, or the increase is small due to the costs of other types of annuities. With a dividend stock portfolio, you can not only earn income from dividends, but also capital gains from stock price growth.

The downside of dividend stock growth is that you will suffer greater volatility because there is no guarantee. As long as you don’t sell your stock when the market is falling and live on dividends alone, this is not a big problem.

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On the other hand, if this factor keeps you awake at night, the guarantee that comes with the annuity may be worth weighing for your growth. Remember, annuities are an insurance policy, so their quality depends on the company you buy them from. If the company goes bankrupt, you will have no money.

Tax stacking

When considering taxes, there are two main differences between the two options. The first is how your income is taxed; the second is the cost basis if you transfer the assets to your heirs after death.

The tax you pay on annuity income is taxed at the ordinary income tax rate.However, for dividend stocks, you pay a lower tax rate on qualifying dividends-if you are in the two lowest tax brackets, you don’t have to pay any taxes. In addition, if you sell stocks for income, the highest tax rate of capital gains tax is up to 20%.This can have a significant impact on the taxes you pay during retirement.

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When you transfer assets to your estate, your heirs’ cost basis will have different rules. With annuities, they get the same foundation as you. For stocks, they get a so-called incremental basis-which means that their cost basis is the price of the stock on the day of your death. Even if your stock returns are 100%, this will have a significant impact on the amount they will ultimately be taxed. If they sell it on a new basis, they will not have to pay capital gains tax.

How does the cost add up

Fees can undermine the growth potential of the investment portfolio. They make it more difficult for you to achieve your goals, because not only must you get the return needed to achieve your goals, but you must also recover the costs you paid for your investment.

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Owning a portfolio of dividend stocks is one of the cheapest ways to own assets. You pay a transaction fee to buy the stock, and then you don’t have to pay any other fees before you sell the stock. In most brokerage companies, you can even reinvest dividends without additional fees. If your investment structure makes you end up living on dividends instead of selling stocks, then you only have to pay a fee.

On the other hand, annuities are full of expenses. Not only do you need to pay a large commission in advance, but if you want to withdraw from the contract, you also need to pay surrender fees, funding fees, and so on.

Bottom line

Annuities are an expensive way to prepare for retirement. Using dividend stocks will reduce fees and taxes, and you can still get the growth and income you need in non-working years.


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