When planning for our futures, many aspects come to mind. Housing, insurance, property, investments and retirement are usually all key front runners. Planning out your retirement can be daunting, so knowing the different pros and cons of retirement income is essential. Bonds and annuities are both commonly used by investors trying to guarantee a steady income for themselves during their retirement years.
However, they both have different risks and benefits involved.
Bonds and annuities allow the investor to create income streams for themselves during retirement, and both are within the asset classification of “fixed income.” Most financial consultants will tell you that annuities are the best investment for retirement plans, mainly because the payments last for life. However, that doesn’t seem to be slowing down the movement and investments of bonds. Bonds tend to be more commonly used because of their ability to be traded on the markets, similar to stocks.
Primarily created and sold by life insurance companies, annuities are a financial product that can be purchased by an investor. They will provide monthly payments over a specified period. These payments are often guaranteed for life, and are meant to serve as a steady stream of income for the investor once they have retired. When you purchase annuities, you are signing on for a long-term contract with a life insurance company, and in doing so, you agree to invest your money either in a lump sum or in broken-down payments over time. In return for your invested capital, you will receive regular payments back to you. The differing types of annuities are classified based on when the payouts to the investor begin.
Immediate annuity: An immediate annuity is when the investor makes a one-time payment to their life insurance company in one lump sum. In exchange, they are guaranteed payments back either for the remainder of the investor’s life or for a predetermined amount of time. An immediate annuity begins paying out as soon as the funding has been provided, which is why it is a popular purchasing option amongst those who are quickly nearing retirement.
Deferred annuity: Deferred annuity investments are bought outright or paid into, but do not begin paying out until a later date. Usually, investors choose a deferred annuity when they want take advantage of compounding interest by deferring tax payments along with protection from market risk, among other benefits.
Bonds are investments issued by governments, corporations and municipalities, and are used by all different types of investors. Bonds are investments in debt and provide regular interest payments to the investor over a fixed period. At the end of that fixed period, the principal investment is returned as well. A bond is essentially an IOU between you and the borrower. You give money to that bond, and they give you back a percentage rate for some time. Once the bond had fully matured, then you are given back your initial investment as well.
Bonds of high quality are usually popular with investors because they offer a steady return with minimal risk to the original investment. During retirement years, these regular payments are used as income for investors who no longer work. Perhaps the primary difference between bonds and annuities is that a bond receives interest payments for a set time, and then the entire investment is returned. Annuities can pay until the end of your life, no matter how long of a time that ends up being.
There are far-reaching benefits to investing in annuities. However, there are also some drawbacks. Before you commit to buy, make yourself aware of some of the risks involved with immediate and deferred annuities.
It is common practice for most insurance companies to bar or restrict you from withdrawals. However, most companies offer free withdrawals of up to 10% annually.
When you purchase your annuity, you are doing so because you need a steady income for your retirement years. Make sure that you consider the treads of inflation when making your annuity purchases because your future income payments may not go as far as you had hoped.
Annuities are insurance contracts, and they can range from three to 12 years in duration and sometimes longer. It is important to choose the appropriate length of contract that fits your investment profile.
Risk is a standard part of investing and is always on the table whenever you plan for your future. Bonds are no different than other investments, in the sense that risk is still a factor that should be kept in mind.
When you invest in a bond, you are always running the risk that the bond’s issuer will be unable to make the interest or principal payments to you on time. There are rating agencies who can tell you their professional estimation on the likelihood of an issuer’s default. Contacting a rating agency is highly recommended before you invest in bonds.
Rising interest rates are a common risk for investors of bonds. Commonly, a rising interest rate will cause a falling bond price. This opens up the opportunity for investors to get better rates on their investments elsewhere. If a bond price is lower, it means that the potential for yields with that bond is considerably higher.
Bonds tend not to be an investment with exceedingly high return rates, and so they are very susceptible to the pitfalls of inflation. Inflation lessens the power of a bond’s interest and principal prices. Inflation usually leads to higher interest rates, which is an adverse risk for bond investors.
Alliance America is an insurance and financial services company. Our financial planners and retirement income certified professionals can assist you in maximizing your retirement resources and help you to achieve your future goals. We have access to an array of products and services, all focused on helping you enjoy the retirement lifestyle you want and deserve. You can request a no-cost, no-obligation consultation by calling (833) 219-6884 today.