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Alternatives to Annuities for Retirement Income


Annuities are a popular choice for retirees concerned they might outlive their retirement savings. These retirement savings vehicles work a bit differently than traditional or Roth retirement accounts. Instead, annuities are a type of contract you enter into with an insurance company and in exchange for paying premiums, you receive guaranteed payments down the line. You can also work with a financial advisor to help you determine the right asset allocation for your retirement accounts. 

Alternatives to Annuities for Fixed Retirement Income

Many consider investing in annuities in order to have a fixed retirement income that they can rely on. However, this involves putting a lot of money upfront and you have to plan ahead to really get the best value out of an annuity. Others will find that it isn’t a good fit for them and might be looking for alternatives for their fixed-income goals.

We’ve put together a list of the top alternatives to annuities for fixed-income retirement planning. Each has its own pros and cons, depending on what your financial goals are and how much time you have before retirement. You’ll likely want to talk to a professional about the asset allocation of your portfolio if you’re not positive about which to choose.

1. Certificates of Deposit (CDs)

CDs are a special type of deposit account offering a favorable interest rate in exchange for holding your money for a set time period, such as four or five years. Many banks and credit unions offer CDs, which typically earn more interest than a traditional savings account. Per the FDIC, the current interest rate on a traditional savings account is just 0.24%, while rates for a 4-year and 5-year CD sit at 0.86% and 0.98%, respectively.

While CDs typically don’t offer high returns, they still provide a reliable source of fixed income for those seeking options for retirement. You can also opt to build a CD ladder or deposit smaller amounts of money to CDs with different maturity dates, such as six months, one year, three years and so on. That way, you’ll reap the benefits of higher interest, but you won’t have a large sum tied up for a long time.

2. Bonds

Bonds are a type of debt instrument or a loan that you make to a government or corporation that helps them fund a specific project. In return, the loan recipient agrees to pay back the total principal—or the total amount of bonds you purchase—with interest.

Bonds are considered a fairly secure investment, though certain high-yield bonds come with more risk for bondholders. Different types of bonds offer different rates of return, though bonds generally provide lower returns than higher-risk investments like stocks. Maturity dates also differ depending on the bond you buy.

The simplest ways to purchase government bonds are through a brokerage account or the U.S. Treasury. In general, U.S. Treasury bonds are considered one of the most secure investments, as they’re backed by the federal government. Interest rates for these bonds change every six months and bondholders also receive interest payments twice a year. Depending on the type of Treasury bond you choose, your bonds could have a maturity date of 20 years or 30 years. You can cash them out after five years without losing any interest, though. But if you cash them out before that, you’ll give up three months of interest payments.

Municipal bonds can be an attractive alternative to annuities if you’re looking for bonds that generate consistent income with low credit risk. Tax-free municipal bonds may be even better since they’re tax-exempt, generally. But there’s one thing to know about investing in muni bonds: tax-exempt status is not always guaranteed.

3. Retirement Income Funds (RIFs)

alternatives to annuities

RIFs act as a conservative investment vehicle for retirement. Typically, RIFs are actively managed mutual funds offering diversified investments in fixed-income assets and equities. They provide regular distributions in the form of interest income or dividends and they offer the opportunity for asset growth.

While RIFs can provide predictable distributions, these funds tend to offer lower returns because they’re considered conservative, fairly low-risk investments. Still, their predictability makes them attractive to some investors and they may work for you depending on your situation. Income-generating mutual funds that aren’t specifically for retirees can be an alternative to retirement income funds. Before you invest, be sure to seek advice from a professional to choose the best option for your financial situation.

4. Dividend Stocks

Dividend stocks are a special type of publicly-traded stock that pays a portion of the company’s earnings to stockholders on a regular basis. Companies that issue dividend stocks are typically established and earn consistent profits each year.

While dividends may be paid out at different intervals depending on the company, most often they’re paid to shareholders on a quarterly basis. This means that retirees who’ve invested in dividend stocks can expect payments every few months. The total dividend payment you receive will depend upon how many shares of the company’s stock you own. As with other types of investments, if you’re thinking of investing in dividend stocks, talk with your financial advisor about whether doing so makes sense for your financial situation.

The Bottom Line

alternatives to annuities

If annuities simply aren’t right for you, certain alternatives can provide you with fixed income streams in retirement. Consider certificate of deposit accounts, bonds, retirement income funds, dividend stocks or some combination of these savings and investment vehicles. While some of these options may not offer the returns you’d get with riskier investments, predictable returns are a value-add for many retirees. Each of these options has pros and cons, though, so be sure to do your research to choose the option that’s best for your situation.

Tips for Retirement Investing

  • Whenever you’re thinking about your portfolio with retirement in mind, it’s important to understand the right balance you need for your goals. A financial advisor can help you figure out the right asset allocation for the right time in your retirement journey. If you don’t have a financial advisor, finding one doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
  • It’s important to know where your savings are compared to what you need to hit your retirement goals. You can use SmartAsset’s free retirement calculator to help you see if you’re currently on track.

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