Annuities Vs. Bonds for Retirement

Annuities and bonds are the two most popular ways to keep your retirement savings safely, however they provide very different benefits. A bond can provide guaranteed fixed interest payments for a certain time period, after which your principal is returned. An annuity also can provide an interest income with return of the principle in the end, but there are also many other options, most popular is turning your principle into a lifelong retirement income similar to a monthly salary for as long as you live. While annuities are purchased from life insurance companies, bonds are purchased from corporations, municipalities and governments.

Annuity Advantages

Most popular feature of annuities is Guaranteed Income for Life which provides a fixed-income stream a retiree can never outlive. The premium is fully surrendered in exchange for guaranteed income, which is the most significant difference between annuities and bonds. However not all annuities require you to forever give up your principle in exchange to guaranteed monthly payments, some annuities allow you to surrender your principle for a set number of years in order to accumulate tax-deferred interest. There is a variety of other annuity benefits, such as death benefit option or electing a joint account option, which allows a surviving spouse to continue receiving monthly benefits. Most fixed index annuities allow penalty-free withdrawal of up to 10% of principal annually. Some annuities also allow penalty-free withdrawal of principle in special circumstances, such as confinement to a nursing home or being diagnosed with a terminal illness.

Investors who purchase annuities years before retirement payments begin not only earn tax-deferred interest, but they can also make additional contributions to the principal. As long as money is not withdrawn from the account, there is no taxation. However, if you need to withdraw some money, only the interest portion of withdrawn money is taxed. Some annuity products give the beneficiary control over when and how much money is paid out as a retirement income, keeping money on the account longer allows you to earn additional compound interest. When the investor begins taking regular distributions, only the portion of the annuity balance that represents interest income is taxed. If an annuity account has a set surrender period, at the end of which the account matures, you have an option of transferring your entire annuity principle, including gains, to another account absolutely tax free as long as you don’t withdraw any payments and follow regulations of tax-free 1035 Exchange. Under certain conditions, this can be a substantial benefit.

Bond Advantages

Bonds are known to earn higher yields than annuities. However, in today’s market it’s not always true. Some fixed index annuity products can produce higher gains than others. Even though an average bond pays higher yield than an average annuity, the bond yields and annuity gains vary significantly. Higher yield bonds are associated with higher risk. Investors must weigh risks against rewards when bond shopping. Bonds are available in both taxable and tax-exempt formats, for obvious reason tax-exempt bonds are more popular. Investors who hold a bond to maturity (when it becomes due) get back the face value or "par value" of the bond. But investors who sell a bond before it matures may get a far different amount. For example, if interest rates have risen since the bond was purchased, the bondholder may have to sell at a discount—below par. But if interest rates have fallen, the bondholder may be able to sell at a premium above par. While bond might have a higher yield for a fixed period, it can’t offer a lifetime income like annuity does. The longer person lives, the higher are the gains produced by your Guaranteed Income for Life annuity investment.