Annuity Vs. Other Guaranteed Income Investments

Save

Annuities offer one way to guarantee income to you during retirement. An annuity provides a fixed or variable payment schedule based on the type of annuity you choose. This payment is designed to last for as long as you need it, with all annuities offering an option for a lifetime income. But, how do other investment options stack up when compared to annuities?

Types

  • There are several alternatives to annuities that are considered "guaranteed income" investments. These include bonds, guaranteed investment contracts and bank CDs. If the issuing company/bank or government does not default on the bond, CD or guaranteed investment contract, it will pay the stated interest rate, which is guaranteed. When compared to annuities, these investments offer many advantages but lack the tax advantages that annuities have. The only exception to this is municipal bonds, which are generally tax-free.

Function

  • Bonds, bank CDs and guaranteed investment contracts pay interest that is generally based on income-producing activities that are relatively stable. For example, a bond is a loan which is repaid on a pre-determined payment schedule. Bank CDs are "certificates of deposit," where the bank accepts money on loan from you, and invests it in other profitable loans or investments, repaying you with interest on the money borrowed.

Benefits and Drawbacks

  • The benefits of investing in non-annuity guaranteed investment products are that these alternative investments are not subject to surrender charges as with most annuity contracts. However, while annuities do have surrender charges, many financial products, such as bank CDs, have other penalties for cashing out the investment before its maturity date. Also, annuities offer payments that can last for your entire life, regardless of the actual amount of money you have available in your annuity contract. No other guaranteed income investment will do this. Once the money is gone, it's gone. With annuities, payments can be made such that you receive more than you would have received from any other guaranteed investment product.

Misconceptions

  • A common misconception is that all annuities have fees associated with them. While this may be true for variable annuities, fixed and indexed annuities often do not have fees for holding the contract. A misconception about guaranteed income investments is that they carry no risk. However, they do. Guaranteed income investments depend on the financial strength of the business making the guarantee.

Considerations

  • One thing to keep in mind, when deciding between guaranteed income investments and an annuity, is what you will need the money for and when you will need it. Annuities are generally considered non-qualified retirement accounts. This means that money is not available for withdrawal without a penalty until age 59-1/2. Guaranteed income investments are not subject to these restrictions.

Related Searches

References

  • Financial Web: Guaranteed Income Investments
  • "Ernst & Young's Personal Financial Planning Guide, 5th edition;" Martin Nissenbaum, Barbara J. Raasch, Charles L. Ratner; 2004
  • "Practicing Financial Planning for Professionals, practitioner's 10th edition;" Sid Mittra, Anandi P. Sahu, Robert A. Crane; 2007
  • Photo Credit dollars image by Mikhail Olykainen from Fotolia.com
Promoted By Zergnet

Comments

You May Also Like

  • What Is Annuity Income?

    Annuity income is income that a life insurance company pays for a specified number of years. An annuity is not a life...

  • Annuity vs. Bond

    When you are preparing for retirement, bonds and annuities can both offer a comparable income stream and tax advantages. Whereas bonds are...

  • What Is a Guaranteed Annuity Rate?

    Fixed deferred annuity rates feature a guaranteed rate of return below which the annuity's interest cannot drop during the term of the...

  • Is the Principal Guaranteed in an Annuity?

    If you invest in an annuity and your investment principal is lost, you could face a serious financial hardship at retirement. To...

  • What Is a Group Annuity Contract?

    Annuity contracts are life insurance products that guarantee an income to policyholders for life or for a set period. A group annuity,...

  • Annuity Vs. Perpetuity

    Whether you are dealing with personal or corporate finance, there are four possible ways that investment cash flows can be realized. Cash...

  • What Are Safe Investments?

    Safe investments are investments that are subject to little or no risk of loss. These investments may or may not be guaranteed...

Related Searches

Check It Out

4 Credit Myths That Are Absolutely False

M
Is DIY in your DNA? Become part of our maker community.
Submit Your Work!