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5 Best Alternatives to Annuities for Retirement

When it comes to retirement planning and thinking about what kind of investments you could make, annuities are often one of the first options that come to mind. They’re available nearly everywhere, advertised a lot as a solid investment choice, and have been around for decades.

While annuities certainly have their place, it’s worth remembering that there are many other choices available, and in some cases, they may be a better fit for your needs. In this article, we will explore five of the best alternatives to annuities for retirement. We’ll look at each option in detail and discuss the pros and cons so that you can make an informed decision about which is suitable for you.

5 Best Alternatives to Annuities for Retirement

What are the Alternative to Annuities?

So, jumping straight into it, let’s explore the five best alternatives to annuities for retirement.

1. Certificates of Deposit for Retirement

A certificate of deposit, or CD, is a type of savings account that offers a fixed interest rate for a set period. CDs are considered low-risk because they’re insured by the FDIC (Federal Deposit Insurance Corporation, a US-based agency) and offer a guaranteed return rate.

These are simple investments. You invest your money as a deposit (which you’ll aptly receive a certificate for), and then your money will sit in the account, gaining interest for a predetermined length of time known as a ‘maturity period’. Most CDs will allow you to keep your money in it for however long you like, however, most will ensure you stay for the set amount of time. Otherwise, you can be penalised and won’t receive any benefit.

However, bear in mind that CDs are not always a good option when it comes to retirement investments. If you’re still young, these won’t really be for you, but if you’re in retirement already, or at least close to retirement age, they could be ideal.

This is because CDs require you to invest your money without touching it, which allows you to earn interest on it. The more money you leave in, the more you’ll make via interest, which is why it’s a good idea. The returns offered on CDs are generally low and won’t provide strong growth over time and may even see the real value of your funds eroded by inflation.

Pros

  • CDs are considered a very safe way to invest money and a secure way to fund your retirement.
  • CDs can offer a higher-than-average rate of interest than most standard savings accounts
  • You are pretty much guaranteed a return on your investment, and you can budget how much you’re going to earn thanks to the non-complex set-up of CDs

Cons

  • Many CD providers will penalise you for withdrawing your funds early, a period of time known as a ‘maturity period’
  • As inflation rises, some CD inflation rates might not be enough to keep up, meaning you won’t be making much money on them
  • While CDs tend to have higher interest rates than most savings accounts, they won’t tend to receive as much from your investment as you would when investing in the stock market.

2. Retirement Income Funds

A Retirement Income Fund (RIF) is a method of investment that allows for a set income to be paid out regularly, an investment type designed explicitly with retirement in mind. A RIF usually falls into the bracket of a mutual fund, which means you pay a lump-sum deposit as your investment into the RIF, which then gets invested into a diverse range of large and mid-range bonds and stocks. This money will then make money, and you’ll get a cut, thus making you money on your money and funding your retirement.

Generally, RIFs generate a steady stream of regular income and usually generate higher returns than CDs and similar investment types. In short, it’s a great way to set up a retirement investment for those who want a guaranteed income during their retirement years without worrying about stock market fluctuations or other such factors.

There are plenty of different types of RIF out there to choose from, depending on which portfolios you depend on investing in and which assets interest you. It’s worth mentioning that there’s typically a 4% maximum withdrawal rate on funds to help ensure you don’t outlive your assets, but you’ll need to check your provider because this can vary.

Pros

  • Accounts and investments are professionally managed and require no input or knowledge from the investor. You won’t need to research a thing
  • A managed RIF will pay out a set amount of money that’s pre-defined with the deposit you make, meaning you’ll never have to worry about how much to take out to keep your investment sustainable
  • The portfolios invested in are usually diverse, which allows the investments to grow and remain balanced and stable, ensuring your income is as well

Cons

  • Most of the time, a management fee is charged, and this will usually reflect the amount of money you’ve deposited at the beginning
  • Due to the nature of Retirement Income Funds, you won’t have any control over where your money is being invested, nor can you choose how much your money is split between stocks and bonds. The entire purpose is that someone else is managing it on your behalf.

3. Bonds for Retirement

Bonds are a debt investment where an investor loans money to an entity – usually a government or corporation – for a set period of time at a fixed interest rate. In terms of retirement investments, they are usually used to help minimise the risk of a retiree’s investments, especially when approaching retirement age.

There aren’t specifically bonds that exist for retirement purposes, but there are many providers that can help to guide you towards bonds or portfolios that are more beneficial to you and your own wants or needs, for example, if you want a high-risk, high-return investment, or one that’s a little safer.

Bonds work in a similar way to many investments. The entity you loan your money to – the borrower – will then use it for their own means, whether it’s infrastructure development or general business costs. The borrower is then obliged to repay the sum of money borrowed plus interest at a set date, known as the ‘maturity date’.

The benefits of bonds usually come from the stability that they offer. The interest rate is fixed, meaning no matter what happens in the economy, you will still receive the same amount of interest each year. This can be great for those nearing retirement as it offers some stability and predictability in an otherwise unpredictable world.

Pros

  • Bonds are popular because they offer relatively high returns compared to most stocks and savings accounts.
  • There’s minimal risk to investing in a bond because the fixed interest rate means you know exactly how much money you’ll get back. Bonds’ predictability can appeal to those nearing retirement as it offers some stability in an otherwise unpredictable world.

Cons

  • The returns on bonds are not as high as other investments such as high-performing stocks or other higher-risk yet higher reward investment options. If you’re looking for high-risk, high-return investments, bonds may not be the best option for you.
  • Bonds are a long-term investment, so if you need access to your money sooner rather than later, they may not be the ideal option.
  • Investing in bonds can be seen as less exciting than other options because of their stability and predictability.
  • The buying process can be a little complicated regarding bonds because they are not as well-known or understood as other investment options, and they must be purchased through the Treasury.
  • If you’re buying the bonds yourself and aren’t using a financial service, you’ll also need to manage the process yourself, which includes filling out documentation correctly and tracking your purchases.

4. Dividend-Paying Stocks for Retirement

Dividend-paying stocks can be an excellent retirement investment, especially if you’re looking for a high-yield investment. A dividend is a sum of money that a company pays out to its shareholders and is usually paid out quarterly. Many companies use dividends as a way to reward their shareholders, and it’s also seen as a way to attract new investors.

Dividend-paying stocks can be an excellent retirement investment because they offer high yields, which means you can potentially make a lot of money from them. They also tend to be less volatile than other stocks, which means they’re less likely to lose value.

However, dividend-paying stocks are not without their risks. They can be more volatile than bonds, and the yields can fluctuate, so you could potentially make less money from them than you expected.

You’re best off taking out dividend-paying stocks and will typically get the best return if you hold them long-term. So, if you’re in retirement or approaching it and you have the money you don’t need access to for a long time, these stocks could be precisely what you’re after. The dividends will get paid out, and you can keep your money invested, thus making you more money over time.

However, it’s also important to remember that you are still investing in a company, so there is always the risk that the company could go bankrupt and you could lose all of its investment.

Pros

  • Dividend-paying stocks offer high yields, which means you can potentially make a lot of money from them, mainly when the money stays invested for long periods of time.
  • These stocks tend to be less volatile than other stocks, which means they are less likely to lose value.
  • Another benefit to consider is that you can hedge against inflation with dividend-paying stocks. This is because as the cost of living goes up, so do the prices of these stocks – meaning your investment is worth more. 

Cons

  • Dividend-paying stocks can be more volatile than bonds, and the yields can fluctuate, which means you could potentially make less money from them than you expected.
  • You’re also investing in a company, so there is always the risk that the company could go bankrupt and you could lose all of your investment.
  • The tax is typically very inefficient when it comes to dividend-paying stocks. This means that you could potentially end up paying more in taxes than you would with other investments.

5. Variable Life Insurance Policies

Variable life insurance policies are another type of insurance product that can be used for retirement purposes. With a variable life insurance policy, the policy’s cash value fluctuates based on the performance of the underlying investment. This means that there is some risk involved, but it also means that there is potential for growth.

How these policies work is that you make premium payments into the policy, and the money is then invested. The policy’s cash value will then fluctuate based on the performance of the underlying investment. You get paid when the policy matures, and the death benefit goes to your beneficiaries, usually your family.

Variable life insurance policies can be a great retirement investment for a few reasons. First, as above, they offer growth potential. This is because the policy’s cash value will fluctuate based on the performance of the underlying investment, which means that it has the potential to grow over time. Another benefit of these policies is that they offer some death benefit protection. This means that if you die before the policy matures, your beneficiaries will receive the death benefit. This can be a great way to provide for your family in case of your untimely death. Lastly, these policies also offer tax-deferred growth. This means that the money that you invest into the policy will not be subject to taxes until it is withdrawn. This can be a great way to grow your money without worrying about paying taxes.

You’ll also want to consider that variable life insurance policies typically have high fees and expenses. This means that they may not be the best option if you’re looking for a low-cost investment. Ideally, you’ll benefit the most from variable life insurance policies if you can hold onto them for a long time. This is because the longer you hold the policy, the more time the cash value will have to grow.

Pros

  • A death benefit that won’t fall unless you stop making timely premium payments.
  • Premium payments may be made in various ways, depending on your needs.
  • The potential to offer greater than typical returns when compared to other forms of permanent life insurance
  • Allows you to retain a certain amount of self-directed control over how your cash value is invested.

Cons

  • High fees and expenses are associated with the policy.
  • The policy’s cash value is subject to market fluctuations, which means that it could go down as well as up.
  • You need to be comfortable with the level of risk involved in this type of investment.
  • Variable life insurance policies might not be the best option if you’re looking for a low-cost investment with an instant return that funds your retirement.

What are the reasons why annuities do not work for some people?

There are a few reasons why annuities do not work for some people. The main reason is that they are not liquid investments, which means you cannot cash them in if you need the money for an emergency. Another reason is that they offer a fixed rate of return, so you will not be able to benefit from any market growth. Annuities are also taxed as income, so you could potentially end up paying more in taxes than you would with other investments.

On top of this, annuities do not work for some people because they are not a liquid investment. This means that you cannot cash them in if you need the money for an emergency. Another reason why annuities do not work for some people is that they offer a fixed rate of return. This means that you will not be able to benefit from any potential growth in the market.

Bringing this all together, with all things considered, the truth is that annuities just don’t really earn that much interest. Yes, they’re somewhat stable, but even with guaranteed income, some lines, especially these days, just can’t keep up with inflation rates or are completely outshined by other kinds of investment.

Why do financial advisors recommend annuities?

Financial advisors recommend annuities for a few reasons. A big benefit of annuities is that they offer some death benefit protection. This means that if you die while the policy is in force, your beneficiaries will receive a death benefit. Finally, annuities can provide some stability in retirement. This is because they offer a fixed rate of return, which means that you will not have to worry about the ups and downs of the market. So, while there are some drawbacks to annuities, there are also some benefits that make them a good option for retirement planning.

What is a better investment than annuities?

There are a few different options that might be better than annuities, depending on your individual circumstances. If you’re looking for an investment that can grow, you might want to consider stocks or mutual funds. These options offer the potential for capital gains, which can provide you with a source of income in retirement.

If you’re looking for an investment that is more liquid than annuities, you might want to consider a certificate of deposit or money market account. These options offer relatively high-interest rates and can be easily accessed if you need the money.

Finally, if you’re looking for a less risky investment than annuities, you might want to consider a bond. Bonds are debt instruments that offer a fixed rate of return, which can provide you with some stability in retirement.

As you can see, there are a few different options that might be better than annuities, depending on your individual circumstances. If you’re looking for an investment that can grow with the potential for significant earnings, you might want to consider stocks or mutual funds. If you’re looking for an investment that is more liquid than annuities, you might want to consider a certificate of deposit or money market account.

For more information on annuities, read Annuity Basics, Formula, Benefits: How does it work?

What is the best age to buy an annuity?

Generally speaking, the best age to invest in and buy an annuity is between the ages of 70 and 75. At this point in your life, you are likely to have a good idea how much income you will need in retirement. You also want to make sure that you have enough money saved up so that you can cover any unexpected expenses. You want to make sure that your annuity will provide you with a steady stream of income for as long as you need it.

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