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What is better than an annuity for retirement?
It depends on the job you are buying it for. For income that cannot run out, delaying Social Security beats almost any annuity. For a set number of years, a bond or CD ladder is cheaper and stays liquid. For growth, an index fund keeps more of the return. An annuity only wins when you need income that outlives the money.
Nothing is better than an annuity until you say what you want it to do.
Better is not a property a product has. It is a comparison, and a comparison needs a job.
People buy annuities for three different jobs and rarely name which one. Income that keeps arriving no matter how long they live. A floor under the money so a bad market cannot take a third of it. Or tax deferral on money that has nowhere else to sit.
Each job has a different competitor. The thing that beats an annuity at the first one will lose badly at the third.
Worth saying where we stand first. opfinances.com is a licensed insurance agency and annuities are one of the things we sell. We are not a financial advisor and not a fiduciary. That is the reason this page is worth your time, because most of what follows is somebody else's product.
For income that never runs out, delaying Social Security beats anything we could sell you.
Every month you postpone claiming past your full retirement age raises your check for the rest of your life. Worked out annually, the increase is around 8 percent on the checks you skipped.
That income also rises with the annual cost of living adjustment, and it is backed by the federal government. A promise written into a commercial contract is a different kind of promise, because it rests on the claims paying ability of the insurance company issuing it.
No income annuity we could put in front of a 70 year old is priced anywhere near that, and adding inflation adjustments widens the gap rather than closing it.
So if the job is lifetime income, the first dollars belong in the wait rather than in a contract. Savings bridge the years in between, and the annuity conversation is about whatever is left after that.
For a fixed number of years, a ladder is cheaper and you can still reach the money.
Say you need 3,000 dollars a month for the eight years between retiring and claiming. That job does not need mortality pooling. It needs money showing up on eight schedules, which is what a ladder does: instruments that mature in each year you need cash, held until they do.
What you keep is access. No surrender period, no rider fee, no ten year window where reaching your own money early costs you a percentage of it. If your plans change in year three, a maturing bond does not argue.
What you give up is the far end. The ladder stops on the day the last rung matures. It has no idea how long you will live and it will not extend itself.
Cost is the part people skip. An income rider on a deferred annuity is typically priced around 1 percent of the account value a year, charged whether or not you ever switch the income on. Over twenty years that is a lot of money for an option you may not use.
For growth, owning the index outright keeps more of the index.
An indexed annuity credits you part of an index's move and protects you from the drops. The protection is real and it is not free. It is paid for with caps, participation rates, and the dividends, which you do not receive.
The dividends are the part that gets skipped in the sales meeting. A large share of the long run return on a broad index has historically come from dividends being reinvested. A product that credits price movement only hands you a smaller version of what you thought you were buying.
So if you can genuinely sit through a 30 percent drop without selling, and do not need that money for ten years, a low cost index fund keeps more of the return. That is the trade, and no illustration changes it.
If you cannot sit through it, either because the money gets spent in five years or because you know yourself, then the floor is worth buying on purpose. That is a fair reason to own one. Being told the market has no downside is not.
One job has no substitute: money that keeps coming after it should have run out.
Buying a lifetime income annuity pools you with everyone else who bought one. Some of them die at 74. The payments they never collect help fund the payments you collect at 94.
That is why a lifetime income annuity can pay out more per year than any ladder you could build to the same age with the same money. The extra is not investment skill. It comes from people whose retirements turned out to be shorter, and every promise in the contract still rests on the claims paying ability of the insurer issuing it.
Nothing in a brokerage account does that. A portfolio can be drawn down carefully and still be emptied, and the risk of living a long time is the one it cannot remove.
Which makes the honest scope narrow. If Social Security and any pension do not cover your fixed monthly bills, an annuity is a reasonable answer for that gap and probably nothing beyond it. If you want growth, access to your money, or the largest number for your children, something else on this page beats it.
Before you decide
Questions worth asking.
What is this product doing for me that delaying Social Security or building a ladder would not do?
What are all the annual costs in dollars on my actual amount, including the rider, the mortality and expense charge, and any fund fees inside it?
How many years is the surrender period, and what percentage do I lose if I need the money in year three?
If this is an indexed product, what is the cap or participation rate today, who is allowed to change it after I sign, and how far down can they move it?
Do I receive the dividends on the index you are showing me, and if not, what has that historically cost?
What are you paid on this, and what would you be paid if I went home and did nothing at all?
Related
Is a bond ladder safer than an annuity?
They carry different kinds of promise. Treasuries are backed by the federal government. An annuity is backed by the claims paying ability of the insurer that issued it, with a state guaranty association behind that up to published limits. Neither one removes inflation risk, and neither one is a substitute for reading what you actually bought.
Are annuities better than CDs?
For a fixed term they are the same shape of deal in different buildings. A CD is a fixed term at a bank with FDIC insurance up to the limits. A multi year fixed annuity is a fixed term at an insurance company. Compare the rate, the term, the tax treatment, and what it costs you to get out early.
Is rental property better than an annuity for retirement income?
It can produce more income, but it is a job rather than a payment. Vacancy, repairs, and tenants all land on you, and selling takes months. It is illiquid in the exact way people worry an annuity is, which is worth noticing before using liquidity as the reason to say no.
Should I put my whole retirement account into an annuity?
Start with a different number. Work out which fixed monthly bills are not covered by Social Security and any pension. That gap is the size of the decision. The balance in your account is not. If someone sizes the recommendation off your balance instead of your gap, ask them why.
What is better than an annuity if I mainly want to leave money to my children?
Almost anything. A life only payout leaves heirs nothing, and an annuity receives no step up in basis, so the growth reaches your children as ordinary income. The same gain held in a brokerage account would have been wiped clean at death instead.
Where this fits.
This question sits inside a bigger one. Annuities walks through the whole decision rather than this one piece of it.
On Point Finances is a licensed insurance agency, not a tax, legal, or investment adviser. This page is general education, not a recommendation, and reading it does not create a client relationship.