Which Generates More Retirement Income — Bonds or Annuities?

Oct 8, 2019 Share This 


So, this article’s headline grabbed you, and you want a knock-down battle between bonds and annuities. We’ll get there, but let’s first take a moment to review why having some guaranteed sources of lifetime income (in addition to Social Security) is often recommended by financial advisors.1

Not only can guaranteed income provide peace of mind, it may allow retirees to take more risks elsewhere in their portfolio. In many cases, an annuity fits the bill, providing steady, monthly income for life starting at a predetermined date.1

Before we explore annuities, however, let’s tackle an age-old question: When it comes to retirement investing, what percentage should be put in equities and what percentage in fixed income? Well, it may depend on three important factors with which you’re likely familiar2:

  • Equities have higher potential returns than fixed income, BUT equities also have higher potential risk
  • Speaking of risk, the younger your client is, the easier he/she can recover from poor outcomes, such as market downturns
  • On the other hand, the older your client is, the less risks he/she should take. After all, they’re closer to using that money during retirement

Given those factors, as your client rushes toward retirement, many financial experts recommend that less money be allocated to equities and more to fixed income. There’s disagreement on that strategy, however, in one important aspect: some experts say the type of fixed income should be annuities, not bonds.2

A quick comparison of bonds and annuities

Bonds and annuities can both be called “fixed income.” Bonds are more familiar simply because they’re traded on the market along with equities. Here are some simple differences2:

The End — Let’s start at the end because bonds provide interest throughout and return principal at the end. Conversely, annuity payments are both interest and principal, with no principal repayment at the end, which makes individual annuity payments higher than a bond.

Duration — Bonds are a set time period. Money can be reinvested to keep generating interest. Annuities provide income forever. Longevity risk is pooled across participants.

Selling — Bonds can be sold. Depending on the movement of interest rates after purchase, money can be gained/lost. There is no ability to sell most annuities.

Source — Corporations issue bonds. Insurance companies offer annuities.

When compared to bonds, annuities often win

Many people have two goals in mind with retirement: having enough money and leaving a legacy. When portfolios containing combinations of stocks, bonds, and/or annuities are tested, the most efficient ones include stocks and income annuities, but not bonds. Plus later in retirement, liquid financial assets may be larger when the portfolio contains annuities.2

Who may not be right for an annuity? Retirees with income that, in addition to Social Security, meets their retirement needs. That could be a pension or someone who is wealthy enough to not run out of money.1 Since less and less people have achieved this level, an annuity can be a solid option.

So, what steps should you take with clients? 

  • Review current investments. Where’s the money? How’s it invested? What’s the stocks/bonds allocation? See where any mutual funds are invested 
  • Determine retirement income needs. Does the combination of Social Security and any pension or other income add up to less than the yearly budget? That’s the “retirement income gap
  • Attack the gap. Can the gap be closed by using annuities to cover only non-discretionary expenses — the “must haves” (housing, food, etc.)? 
  • Understand annuity types. Most annuities provide guaranteed retirement income. Some do more, however, because they have more features (and they’re more expensive) 
  • Make a plan. For instance, before retirement, replace half (or so) of bonds with annuities. At retirement, replace all bonds with annuities. Use money from an IRA, or any retirement savings, to buy annuities and adjust portfolio allocations so assets are heavily invested in equities

Of course nothing is certain, yet many experts argue that annuities are a better way to generate retirement income than bonds.2 Take the time to listen to your clients’ situation and goals, and consider sharing the benefits of annuities.

You can also help clients plan for retirement, especially if they’re worried about running out of money, by reading Managing Longevity Risk in Retirement Planning. This 16-page guide offers strategies to the numerous obstacles that stand between investors and a successful retirement. Click the link below to access your copy.

Managing Longevity Risk in Retirement Planning


1Barron’s, How to Protect Your Retirement With Income Annuities, December 15, 2018

2Forbes, Bonds Or Annuities: What's The Best Way To Generate Retirement Income?, July 16, 2018 


Topics: Advanced Planning, Retirement Planning