Annuities offer one way to guarantee income to you during retirement. An annuity provides a fixed or variable payment schedule based on the type of annuity you choose. This payment is designed to last for as long as you need it, with all annuities offering an option for a lifetime income. But, how do other investment options stack up when compared to annuities?
There are several alternatives to annuities that are considered "guaranteed income" investments. These include bonds, guaranteed investment contracts and bank CDs. If the issuing company/bank or government does not default on the bond, CD or guaranteed investment contract, it will pay the stated interest rate, which is guaranteed. When compared to annuities, these investments offer many advantages but lack the tax advantages that annuities have. The only exception to this is municipal bonds, which are generally tax-free.
Bonds, bank CDs and guaranteed investment contracts pay interest that is generally based on income-producing activities that are relatively stable. For example, a bond is a loan which is repaid on a pre-determined payment schedule. Bank CDs are "certificates of deposit," where the bank accepts money on loan from you, and invests it in other profitable loans or investments, repaying you with interest on the money borrowed.
Benefits and Drawbacks
The benefits of investing in non-annuity guaranteed investment products are that these alternative investments are not subject to surrender charges as with most annuity contracts. However, while annuities do have surrender charges, many financial products, such as bank CDs, have other penalties for cashing out the investment before its maturity date. Also, annuities offer payments that can last for your entire life, regardless of the actual amount of money you have available in your annuity contract. No other guaranteed income investment will do this. Once the money is gone, it's gone. With annuities, payments can be made such that you receive more than you would have received from any other guaranteed investment product.
A common misconception is that all annuities have fees associated with them. While this may be true for variable annuities, fixed and indexed annuities often do not have fees for holding the contract. A misconception about guaranteed income investments is that they carry no risk. However, they do. Guaranteed income investments depend on the financial strength of the business making the guarantee.
One thing to keep in mind, when deciding between guaranteed income investments and an annuity, is what you will need the money for and when you will need it. Annuities are generally considered non-qualified retirement accounts. This means that money is not available for withdrawal without a penalty until age 59-1/2. Guaranteed income investments are not subject to these restrictions.
- Financial Web: Guaranteed Income Investments
- "Ernst & Young's Personal Financial Planning Guide, 5th edition;" Martin Nissenbaum, Barbara J. Raasch, Charles L. Ratner; 2004
- "Practicing Financial Planning for Professionals, practitioner's 10th edition;" Sid Mittra, Anandi P. Sahu, Robert A. Crane; 2007
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