Considering an Annuity for Retirement? Learn About Potential Options

TL;DR: Considering an Annuity for Retirement?

Annuities offer reliable income, but they’re not ideal for everyone. Consider these alternatives based on your goals and risk tolerance:

• Bonds: Low-risk, steady interest over time.
• Certificates of Deposit (CDs): Fixed returns from banks/credit unions.
• Mutual Funds: Diversified, growth-focused, with higher risk and potential reward.

The right choice depends on your financial situation. A fiduciary financial advisor can help you decide.

Annuities are one of many options for investing wealth and generating passive income in retirement. There are many types of annuities, including those offering deferred or immediate payouts and fixed versus variable returns.

The process of choosing the annuity for your individual needs and retirement goals is an exercise in and of itself. However, it’s only one part of the larger effort that supports retirement saving and investment strategies.

It’s a simple fact, but it’s important to mention as a reminder: Everyone has different resources, assets, and objectives that influence their decisions about planning for retirement.

So, in general, we believe there is no simple answer to the question, “What is better than an annuity for retirement?” In some cases, annuities can be a useful and valuable addition to an investment portfolio. In others, alternatives to annuities may be more beneficial.

Understanding the available alternatives to annuities can help you make a more informed decision about retirement. So can speaking with a reliable financial advisor for retirement. These professionals can provide personalized guidance, answering that question for you on a personal level.

Now, let’s briefly review what an annuity is and its key benefits and drawbacks. Then, we’ll highlight a few potential alternatives to annuities.

What are Annuities?

On their most basic level, annuities used for retirement investment are a contract between an insurance company and an individual. Their goal is to provide a reliable income stream and, generally, for the individual to avoid running out of money too soon in retirement. The person funding the annuity can be seen as trading liquidity (direct and immediate access to their money) for regularly scheduled payouts in the future.

Annuities have two major phases, as Investopedia explains. In the accumulation phase, the individual makes payments – either a lump sum or scheduled payments – and the investment grows.

In the payout phase, which can be triggered by several conditions based on the exact type of annuity involved, the individual receives regularly scheduled payouts from the annuity.

Annuities are retirement vehicles and come with many advantages and disadvantages. The structure of the annuity – whether it’s funded using pre- or post-tax dollars, the choice of a fixed or variable rate of return – all influence whether that annuity aligns with individual financial goals.

Speaking with a financial advisor can help you understand not only if an annuity is a sensible financial decision for retirement but which type of annuity and annuity structure could offer the most benefits.

Alternatives to Annuities for Retirement Investing

When considering safe income investments for retirees, it’s again important to note that everyone’s situation is different. None of the following annuity alternatives are better for everyone than an annuity. However, they can offer valuable benefits to some retirees and those planning for retirement.

So, what are some common alternatives to annuities?

Bonds

As the US Securities and Exchange Commission (SEC) explains, bonds are essentially an IOU. Investors lend money to the bond issuer with the promise that they will be paid interest over time and repaid the principal after a certain amount of time has passed.

In the annuity vs bond comparison, there are a few key points to keep in mind. Bonds can be seen as simpler – there is a set maturity date for the bond, with interest payments spread between the start date and maturity date. Once maturity is reached, the issuer pays back the principal.

Bonds generally provide reliable returns. The companies and governments that issue them may face insolvency, but bonds are insured by their issuers. There is a larger risk of a company dissolving than a government, so bonds issued by governments are seen as more stable.

Certificates of Deposit (CDs)

CDs, issued by financial institutions, require investors to deposit principal for a specified period of time. In return, the bank or credit union pays out interest until the CD reaches its term. Those interest rates are often, but not always, more favorable than what is available through a savings account or other more flexible interest-bearing accounts.

CDs offer reliability, although they do not provide an especially high return on investment. CD ladders, meaning the use of multiple CDs with different timeframes, can be used to balance access and return.

Mutual Funds

Mutual funds bring together money from many investors to purchase bonds, stocks, and other securities. Mutual funds can be passively or actively managed, with fees varying based on the level of management and other factors. They may simply track a stock market index, as with index funds, or be focused on short-term debt securities

Target date funds can be an effective choice for some individuals when planning for retirement. This type of mutual fund changes the allocation of securities it holds over time.

Mutual funds generally present a greater risk than annuities, bonds, or CDs. They are dependent on the performance of specific securities and the overall market. However, they can also potentially offer higher returns as well.

Financial Advice for Your Needs

Bonds, CDs, and mutual funds are just a few of the many alternatives to annuities for retirement investing. The question to ask yourself isn’t necessarily “What is better than an annuity for retirement?” but “What investment options are right for me in retirement?”

A fiduciary financial advisor – a professional with an ethical and legal duty to act in their client’s best interests – can help you answer this crucial question. By learning about your finances, goals, and needs, they can help build the context necessary to provide impartial and accurate guidance.

Schedule your complimentary assessment today!