Annuities vs. Bonds: How To Choose the Best Investment for You

According to the 2022 Survey of Consumer Finances, the average retirement savings amount for all families was $339,940. With inflation eroding savings, the amount you need to set aside for the future will likely change and could impact your retirement planning.

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As you set up your retirement portfolio, you will likely explore how to create an income for yourself in your golden years, so you don’t have to stress about paying the bills. If you’re deciding between investing in annuities or bonds, there are a few key things you’ll need to consider.

What Are Annuities?

Annuities are often used as a boost to retirement savings and a reliable source of income in the future. These safe instruments help you weather market volatility and mitigate the chance that you could outlive your savings. With an annuity, the investor pays a specific sum of money to an insurance company to receive a fixed amount of money on a regular basis.

“An annuity is a contract between two parties, a consumer and an insurance company, that requires the insurance company to pay fixed interest or guaranteed streams of income,” said Stephen Kates, CFP, the principal financial analyst for “Generally, the underlying investments of annuities can be fixed or variable and pay out income either immediately or deferred into the future.”

Some of the benefits of annuities are:

  • Guaranteed income stream: As a retiree, annuities can provide you with a cash flow similar to a pension.
  • Tax-deferred growth: When you invest in an annuity, you don’t have to pay taxes on earnings until you withdraw an income.
  • Death benefit: If the investor of an annuity passes away before the term ends, their beneficiary can receive the payout.

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What Are Bonds?

“A bond is a debt security with a defined maturity that pays interest to the investor on a principal amount paid to the borrower,” Kates explained. Bonds are typically issued by corporations, governments and municipalities.

It’s worth pointing out that bonds are more liquid, while annuities are a better hedge against inflation.

Some of the benefits of bonds include:

  • Fixed income in the future: The investor receives a fixed income stream, since bonds pay a set interest rate for a specific period of time.
  • Diversify your portfolio: You can spread out your risks so that you don’t have to stress about the stock market.

What Are the Differences Between Annuities and Bonds?

Annuities and bonds are popular investment options — both can provide a steady and consistent income stream during retirement. These conservative financial instruments are preferred for secure retirement income planning. However, even though both are savings vehicles that make periodic payments over a specific period, in other ways, they couldn’t be more different.

“A lifetime annuity, for example, will last as long as the annuitant lives, whereas a bond will only pay out its interest over the period of time until the maturity date,” said Gregory Olsen, CFP and partner at Lenox Advisors.

Bonds are debt instruments in which you are owed, so you receive cash flow in the form of interest payments until you get the principal back at the maturity date. With an annuity, you receive payments based on a contractually agreed-upon guarantee with the issuing company.

Kates shared his insights on the key difference between annuities and bonds: “One of the major differences between annuities and bonds is the term length of the expected income. Bonds are typically purchased for terms that vary from one month to 30 years. Fixed annuities, which most closely resemble bonds or CDs, are sold in term lengths of three to 10 years.”

Which Is the Better Investment?

There isn’t a perfect solution that fits all circumstances, as everyone has different investing goals and risk tolerance levels.

“Which works better for you depends on where you are in your financial journey,” said Scott Lieberman, founder of Touchdown Money. “If you will invest regularly, bonds are usually better for you. If you don’t have a big portfolio, you’ll likely do better with annuities.”

The good news is that you don’t have to choose between an annuity or a bond for your portfolio.

Kates added, “Owning only one of either is a mistake in retirement. Creating elements of growth, flexibility and guarantees are equally important as part of a successful retirement income plan.”

When To Focus On Annuities

With annuities, you receive tax deferral for your contributions for the length of the contract, and the money is only taxed when it is withdrawn. If you’re looking for a reliable income in retirement and want to defer taxes, this will be the better option for you.

“For someone who expects to live a long time and fears running out of money in retirement, there is no replacement for an annuity,” said Kates.

There’s a reason a pension is one of the most popular financial products — people want consistent and reliable money coming in during their retirement.

Olsen pointed out, “If lifetime income is needed, an annuity should often be considered for at least a portion of the investors’ assets.”

When To Invest In Bonds

Bonds offer more liquidity and flexibility, especially within mutual funds and ETFs, which makes them a popular choice for investors looking for conservative investments.

“Bonds are more broadly used by all investors as a conservative alternative to stock markets, short-term savings and as an income-producing asset,” Kates said.

Lieberman offered some additional thoughts: “Bonds are better if you’re looking for a finite passive income stream that you’ll want to reinvest in another account later. Annuities work well for people closer to retirement age who don’t need to reinvest the money.”

If you’re not sure which is best for you, you should consult with a professional financial advisor to make an informed decision based on your retirement and lifestyle goals.

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This article originally appeared on Annuities vs. Bonds: How To Choose the Best Investment for You

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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