Annuity123 is dedicated to providing Americans with unbiased information about retirement, answering the tough questions you want to know.

With hundreds of articles on every retirement planning topic you can think of, peace of mind is just a click away.

Annuities vs. Bonds: which would be better?

Ash Toumayants

Senator Rob Portman recently revealed that about 10,000 baby boomers hit retirement each day. The typical retirement age is 65. This is the time when most retirees experience confusion. The employment that was a haven for income flow ceases. As such, investment advisors and consultants have recently found themselves answering questions regarding the best financial instruments and schemes to adopt for investment.

One question many ask is — between annuity and bonds, which would be a better source of income for a baby boomer? Before going into details, we must understand the two instruments. Bonds are investments in which the bondholder typically lends money to a corporation for a defined timeframe and interest rate. Annuities are agreements in which the insurer pays the annuitant periodic amounts upon the maturity of the contract until the annuitant dies.

  1. Annuities have a guaranteed lifelong income flow

Annuities, and especially fixed indexed annuities with income riders, have a guaranteed lifetime inflow of income. They, therefore, offer the baby boomers financial protection. Bonds, on the other hand, are not lifetime sources of income, but, rather, investment strategies. Bond income is not perpetual, and what is worse, their inflows shift with interest rates.

  1. Do bonds offer the retirees liquidity benefits?

Annuities are long-term contracts, between five to 10 years to be exact. This means that if you need access to more than 10% of the amount deposited in the annuity you will pay a surrender fee. On the other hand, one can sell their bonds at any time, especially when a need for liquid cash arises. There is one thing to consider with bonds; when selling the bond, you have no assurance that you’ll get what you paid for it. If interest rates rise, you typically won’t find anyone who’s willing to give you full price on your old bond with a lower rate. You’ll most likely be forced to sell at a discount. Granted, the inverse is true as well, but you’d have to assume that interest rates would continue to go down. With an annuity you can withdraw up to 10% without any fees or charges, and some allow you to withdraw up to 20%.

  1. Annuities are protected from market fluctuations

One thing that stresses retirees is the interest rate risk. This risk creates uncertainties on the level of returns to expect from an investment. Unlike annuities, bonds are highly susceptible to increase in interest rates. A rise in interest rates lowers bond prices. This reduces the expected returns. Annuities offer a guaranteed sum of income regardless of the interest rates.

  1. Annuities tend to be expensive

Most analysts have established that annuities appear to be more expensive than equivalent bonds. Annuities attract more expenses than bonds. Every feature and option an investor adds to an annuity will always call for an extra cost. Moreover, some annuities, such as the fixed annuities, need additional protection such as inflation cover to help shield the regular income during inflation.

  1. Bonds have higher yields

The investment rule seems to apply here: the higher the risk, the higher the return. Investing in bonds attracts a greater risk, but this translates to higher yields in most occasions in the short-run. To earn more, a greater risk level must be present. Unlike bonds, annuities have lower risks and thus a lower return level in the short-run. Annuities, however, in the long-run could yield higher incomes than equivalent bonds.

The Bottom Line

Deciding which investment tool is the best would lead to bias. Each has its benefits and the tastes and investment plans of baby boomers vary from one to another. Annuities are good for those who wish to have a quiet life after retirement with a secure income. Bonds will be more flexible in that they will offer retirement returns in addition to other options of diversification. Therefore, the choice is really for the baby boomer!

About the Author:

Ash is the founder of Strong Tower Associates. For over a decade, he has helped hard working people across Central Pennsylvania prepare for retirement. In order to gain access to the most beneficial financial tools and services for his clients, Ash decided to start his own firm. Fueled by a passion for helping people see through the veil of confusion that shrouds the financial world, his goal is to educate his clients so they can make more sound choices regarding their financial future.

Investment Advisory Services offered through Retirement Wealth Advisors, (RWA) a Registered Investment Advisor. Strong Tower Associates and RWA are not affiliated. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. Past performance does not guarantee future results. Consult your financial professional before making any investment decision.

Any comments regarding annuities, safe and secure investments, and guaranteed income streams refer only to fixed insurance products. They do not refer in any way to securities or investment advisory products. Fixed Insurance and Annuity product guarantees are subject to the claims‐paying ability of the issuing company and are not offered by Retirement Wealth Advisors.



Annuity123 does not offer insurance, investment, or tax advice.  You should always seek the guidance of qualified and licensed professionals concerning your personal insurance, investment, or tax matters.  Annuity123 is simply a platform allowing retirement planning professionals to help educate the community on various retirement planning topics.  Annuity123 does not directly support or take responsibility for ensuring the accuracy of the content displayed in the articles themselves or any feedback that may get added in the Comments section from the community.

1 Comment

  • I honestly had no idea what income annuities were before I read this article. I think that lots of people can benefit from having it though. Some people need the extra income from month to month, but it is always wise to be smart about it!

Leave a Reply

Your email address will not be published. Required fields are marked *