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Fixed Annuity Risk Tolerance

Assessing Your Risk Tolerance for Investing

Annuity Risk

Annuities and stocks are viewed as distinctly different investment vehicles. In their most simply form, annuities offer security typically are considered to be very low risk. On the other hand, stocks offer a much higher potential for growth, but have a bottom side risk that can be concerning for frugal investors. If you ask a financial planner, they will not advise you to view these products as interchangeable, rather as complimentary vehicles that will offer balance to your financial portfolio.

Once you get to the point where you know you want to invest your money somewhere, the first questions that you need to answer is "What types of risks am I willing to take with this money?"

We will go over the various types of risk and the plausible investments that go along with each type.

Market Risk

This is the most popular type of risk in the media. The reason for its popularity is because it is directly tied to the performance of our economy, and has dramatic implications on clients' potential for wealth accumulation (or loss). Market risk is closely related to stocks, because the performance of the market determines potential gains, or loss of principal in stock investments.

Annuities on the other hand, carry no market risk. The client sacrifices upside risk, but has a guarantee that they can't lose their principal. For clients who struggle with the idea of losing their premium due to market risk, annuities have a big leg up on stocks.

Annuity Buyers Guide

Inflation Risk

Inflation has the capacity to greatly impact the value of your dollar over time. Investing in a low risk product (such as a fixed annuity), leaves the possibility for the investment to under perform inflation. In this case, your money is worth less when you get it back than it was when you put it in.

If you are a person who is concerned that inflation may outperform a conservative investment, then stocks are the way to go.

annuity risk

Taxation Risk

The most appealing feature of annuities for investors is their tax benefits. It is one of the only investment vehicles that offer tax deferred growth and then only partial taxation when income is taken.


As far as stocks are concerned, they have minimal tax benefits. Taxation may not be quite as high on gains and there is opportunity to write off losses, but on the whole, annuities are much more appealing for tax risks.

Liquidity Risk

Annuities are not popular for their liquidity. That being said, in most cases, the annuitant will have opportunities to withdraw a portion of their funds free of charge (in many cases this is a yearly opportunity).


All annuities do come with a surrender charge, which takes a percentage of the accumulation value, based on the amount of time that the annuity has existed (i.e. the more recent the purchase of the annuity, the more expensive the surrender charge).


Stocks have more accessible liquidity that annuities do. The difficulty in liquefying stocks is that they have the opportunity to fluctuate so much on a day to day basis, that there is never a “perfect time” to withdraw. Access to capital is not a huge advantage or disadvantage for either product.

In Closing

The best recommendation is to keep your portfolio balanced and have your eggs dispersed in numerous baskets. Keep money set aside in an annuity that you are not willing to lose and toy with the stock market with the money that you are able to comfortably risk in pursuit of possible gains. Also, allow your investments time to develop. Don’t put your money in an annuity if it’s possible you will need it six months down the road and don’t try to double your money in the stock market in a week’s time. Stay in tune with your financial planner and continue to reassess your ability and willingness to take risks.

All Annuity Articles

For an in-depth explanation of index annuity products and to get a free comparison of quotes from the highest-rated insurance providers, Click Here

Annuity buyer's guide: The pros & Cons of annuities

The Annuity Buyers Guide provides a clear, honest breakdown of annuities.


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