Annuities are one of the first options that come to mind during retirement planning. They come with little risk and create a guaranteed financial safety net for your golden years.
Despite the reasons many retirees choose annuities, other options may better suit your current and future financial situation.
We explain how alternative investment options compare to annuities for retirement – read on.
Annuities
Annuities are one of the safest long-term investment options for retirees. Investors sign a contract with their insurance company to pay premiums in exchange for a steady income stream to last the duration of their retirement.
Here are some of the pros and cons of annuities for retirement.
Pros
- High customization
- Guaranteed income
- Tax-deferred growth
Cons
- High up-front costs
- Early withdrawal penalties or fees
Despite their popularity, there are alternatives to annuities retirees should consider before investing.
Certificates of Deposit
A certificate of deposit (CD) is a type of savings account used as a time deposit by banks, credit unions, and other financial institutions. CDs’ ability to earn interest at a fixed rate over a specified term makes them unique.
Here are some of the pros and cons of certificates of deposit for retirement.
Pros
- Safe and secure way to invest for retirement
- Can offer a higher-than-average rate of interest
- Accurate budgeting due to a guaranteed return on investment (ROI)
Cons
- Penalty for withdrawing funds before the maturity period
- Risk of high inflation rates reducing your ROI
CDs are a short-term investment option with annually taxed interest, whereas annuities are long-term investments with tax-deferred growth.
Bonds
Bonds are loans that provide retirees with money for a set period at a fixed interest rate. There are a variety of bond types, including Treasury bonds and municipal bonds, that minimize risk. However, the bond sum plus tax must be repaid by the maturation date.
Here are some of the pros and cons of bonds for retirement.
Pros
- Inflation hedge
- High portfolio diversification
- Minimal risk because of fixed interest
Cons
- Annual investment limit
- Interest is taxable
Comparing annuities to bonds is difficult, but annuities are the better option for generating income.
Retirement Income Fund
A retirement income fund (RIF) is a mutual fund that uses a lump sum payment to invest in a diverse range of bonds and stocks. The money made from these investments provides payouts with high return potential.
Here are some of the pros and cons of retirement income funds.
Pros
- A professionally managed, hands-off investment
- Pays out a set amount of money
- Contains diverse portfolios to provide a balanced income
Cons
- Requires a management fee
- Lack of control over investments
Unlike annuities for retirement, RIFs have a high market risk that does not guarantee returns.
Dividend-Paying Stocks
Dividend-paying stocks are a high-yield investment option that comes as a lump sum paid out quarterly by companies. These stocks act as a reward to shareholders and rely on the success of the company they come from.
Here are some of the pros and cons of dividend-paying stocks for retirement.
Pros
- Offer high returns
- Less volatile and less likely to lose value
- Can hedge against inflation
Cons
- Yields can lose value due to market fluctuation
- Can lose investment due to company bankruptcy
Dividend-paying stocks do not guarantee a steady income stream, but they have the potential for a higher return if you are comfortable with higher risks.
Which Option Is the Best?
Consider your financial retirement goals before investing. Many people choose annuities for retirement because of the simplicity and guaranteed income.
However, another option may be better suited for your retirement plans. Weigh the pros and cons with a retirement planner to discover the best choice for your future.