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Annuities may not suit every financial plan. The best alternatives allow you to tailor your strategies to your financial goals and risk tolerance. There are a handful of financial products that fit that bill.
But annuities still have benefits that these other options might not, like a guaranteed income for life. Before you buy an annuity, it’s wise to consider all options available to you to be confident in your decision.
Not sure if there’s something better than an annuity for your retirement plans? You’re not the only one! While annuities offer guaranteed income streams, they have a lot of problems, such as high fees, limited liquidity, and complicated terms that may not fit with your retirement goals.
I’ve spent years researching retirement options, and I’m excited to share alternatives that might work better for you. The good news? You have plenty of choices that offer better flexibility, potentially higher returns, and fewer restrictions than traditional annuities.
Why Look Beyond Annuities?
Before diving into alternatives, let’s address why you might want something better than an annuity
- High fees and commissions that eat into your returns
- Limited liquidity making it difficult to access your money in emergencies
- Complex contracts with confusing terms and conditions
- Potential tax penalties for early withdrawals
- Reduced growth potential compared to other investment vehicles
As Moshe A. FIU professor Milevsky says, “Like any other insurance policy, it’s important for everyone to have enough insurance—but not too much.” If you have a pension or Social Security that gives you a good amount of guaranteed income, you may not need an annuity at all.
9 Better Alternatives to Annuities for Retirement Income
Let’s explore options that might serve your retirement needs better than an annuity:
1. Treasury Bonds
Why they’re better: Treasury bonds offer government-backed security with more flexibility and potentially better tax advantages than annuities.
Treasury bonds are debt securities issued by the U,S government with predictable returns and principal protection They’re ideal for risk-averse investors seeking stable income without the complex contracts of annuities,
Key benefits:
- Government-backed safety
- Predictable returns
- Tax-deferred growth
- No complex insurance contracts
- Greater liquidity than most annuities
2. Certificates of Deposit (CDs)
Why they’re better: CDs offer competitive rates with significantly more liquidity and simplicity than annuities.
CDs are time deposits that offer higher interest rates than traditional savings accounts and are FDIC-insured up to $250,000. Unlike annuities, they have shorter terms and much lower penalties for early withdrawal.
Key benefits:
- FDIC insurance up to $250,000
- Higher interest rates than savings accounts
- Diverse maturity options (3 months to 5+ years)
- Simple, transparent terms
- Lower early withdrawal penalties than annuities
3. Dividend-Paying Stock Funds
Why they’re better: Dividend stocks offer much better growth potential, income, and liquidity than most annuities.
Dividend-paying stock funds can provide higher returns through regular dividend payments plus potential capital appreciation. Unlike annuities, you maintain full control of your assets and can adjust your portfolio as needed.
Key benefits:
- Potentially higher returns than annuities
- Regular income through dividends
- Liquidity to sell when needed
- Opportunity for capital growth
- No surrender charges or complex contracts
4. Retirement Income Funds (RIFs)
Why they’re better: RIFs offer customizable income strategies without the rigid structure of annuities.
Retirement income funds consist of conservative mutual funds with fixed-income securities and equities aimed at providing steady returns with regular payouts. They offer flexibility that annuities simply can’t match.
Key benefits:
- Customizable portfolios
- Adjustable income withdrawals
- Potential for growth
- No surrender periods
- Lower fees than many annuities
5. 401(k)s and IRAs
Why they’re better: Retirement accounts offer tax advantages and investment flexibility that annuities can’t match.
You can invest in a wide range of assets and get big tax breaks with these retirement accounts. For many retirees, they are better than annuities because they give them more control and flexibility.
Key benefits:
- Tax advantages
- Investment flexibility
- Lower fees than most annuities
- No insurance company middleman
- Control over withdrawal strategy
6. Real Estate Investments
Why they’re better: Real estate can provide both income and appreciation without the restrictions of annuities.
Investing in rental properties can generate passive income through rent payments while potentially appreciating in value. Unlike annuities, real estate offers tangible assets with multiple income strategies.
Key benefits:
- Rental income
- Potential property appreciation
- Tax advantages through depreciation
- Leverage opportunities
- Inflation protection
7. Variable Life Insurance
Why they’re better: Variable life policies offer death benefits plus investment potential with more flexibility than annuities.
This type of insurance combines death benefits with investment opportunities, offering tax-deferred growth and access to cash value during your lifetime without the same restrictions as annuities.
Key benefits:
- Tax-deferred growth
- Death benefit for heirs
- Access to cash value
- Investment options
- More flexibility than many annuities
8. Real Estate Investment Trusts (REITs)
Why they’re better: REITs offer real estate exposure with higher dividend yields than many annuities provide.
REITs allow you to invest in real estate without directly buying property. Most publicly traded REITs must pay out at least 90% of their taxable income as dividends, potentially providing higher yields than annuities.
Key benefits:
- High dividend yields
- Real estate market exposure
- Liquidity (for publicly traded REITs)
- Professional management
- Diversification across multiple properties
9. Bond Ladders
Why they’re better: Bond ladders provide predictable income streams with more control than annuities.
A bond ladder strategy involves buying bonds with staggered maturity dates. This creates a predictable income stream while maintaining flexibility and control that annuities don’t offer.
Key benefits:
- Customizable income schedule
- Control over investment selections
- No insurance company fees
- Better liquidity options
- Potential for higher overall returns
Case Study: Making the Right Choice
Let me share a real-world example based on a case study:
Barbara, a 30-year-old who recently inherited a substantial sum, considered annuities for their stable income. However, given her long time horizon, the current high interest rate environment, and her moderate risk aversion, a different approach made more sense.
Instead of locking up her money in an annuity, Barbara opted for a CD ladder strategy in the near term. This gave her:
- Immediate peace of mind
- Strong near-term income generation
- Time to explore higher-returning long-term investments
- Flexibility to adjust as her needs changed
This approach allowed Barbara to take advantage of high current interest rates while maintaining flexibility that an annuity wouldn’t provide.
How to Choose What’s Right for You
When deciding what’s better than an annuity for your situation, consider these factors:
- Risk tolerance: How comfortable are you with market fluctuations?
- Liquidity needs: Might you need access to your funds quickly?
- Time horizon: How long before you need to access the money?
- Income requirements: How much regular income do you need?
- Tax situation: Which options provide the best tax advantages for you?
Remember, you don’t have to choose just one alternative. As Milevsky notes, “You don’t have to go ‘all in’ and can diversify across various products—some annuity, some not.”
Frequently Asked Questions
Q: What are the biggest drawbacks of annuities?
A: The main drawbacks include high fees, limited liquidity, potential tax penalties for early withdrawals, and reduced growth potential compared to other investments.
Q: When might an annuity not be the best choice?
A: Annuities may not be ideal if you need quick access to your funds, have a high risk tolerance, or already have substantial guaranteed income from other sources like Social Security or pensions.
Q: How can I find the best alternative to an annuity?
A: Consult with a financial advisor who works as a fiduciary to assess your individual circumstances and explore options tailored to your specific needs and goals.
Final Thoughts
While annuities have their place in retirement planning, they’re not the only option—and often not the best one. By exploring these alternatives, you can create a retirement income strategy that offers greater flexibility, potential for higher returns, and better alignment with your personal financial goals.
The best approach is usually a diversified one. Consider mixing several of these alternatives to create a retirement income strategy that provides both security and growth potential.
Have you tried any of these annuity alternatives? I’d love to hear about your experiences in the comments below!
Alternatives to Fixed Annuities
Bonds and certificates of deposit are the most commonly mentioned comparisons to annuities, but comparing annuities to CDs or bonds is not apples-to-apples.
Typically, CDs are seen as shorter-term investments and their interest is taxed annually. On the other hand, annuities are longer-term investments that offer tax-deferred growth.
Government bonds pay interest and return the principal when they mature. Annuities, on the other hand, can make regular payments, usually for retirement income.
A Quick Comparison of Annuities, CDs and Government Bonds
| Type | Taxation | Principal Protected? | Interest |
| Fixed Annuity | Tax-deferred growth | Yes | Preset/guaranteed |
| Government Bond | Interest income may be taxed or tax-free | Yes | Most pay fixed rate of interest, but subject to interest rate risk |
| Certificate of Deposit | Interest income taxed | Yes | Preset/guaranteed |
In addition to bonds and CDs, retirement income funds and dividend-paying stocks are worth evaluating as alternatives to an annuity.
Select all that apply
When To Choose an Annuity Alternative
Annuities are a valuable tool for long-term financial planning. Still, certain aspects of annuities may not align with your financial objectives, risk tolerance, or liquidity requirements. Additionally, some people worry about annuities’ complexity, fees, commissions, and taxation rules.
Annuities are insurance products. “No matter what kind of insurance people have, it’s important for everyone to have enough, but not too much,” Moshe A. Milevsky, a professor of finance at York University and managing director of the private consulting firm PiLECo, told Annuity. org.
You might not need an annuity if you already have many other forms of guaranteed income, like a large pension from work or ample income from Social Security, according to Milevsky.
In these cases, an annuity alternative can be a better choice.