If you’re a conservative investor looking for a steady stream of payments, both bonds and fixed index annuities might be for you. But what’s the difference between the two?
Read on to learn more about fixed index annuities versus bonds and how to determine which is best suited to your investing style.
What Are Bonds?
Bonds are essentially very small loans to a government or company. The savings bonds you got as a kid count, but school districts, cities, foreign governments, and big private companies sell them, too!
Unlike savings bonds, which return the face value of the bond after 20 or 30 years, most bonds pay you a bit of interest over a fixed period. After the fixed period has ended, they return the investment.
Advantages
Bonds can be a wise choice if you’re looking to add to your income over a set length of time.
They also provide a method for safely investing money for children or grandchildren.
Disadvantages
As long-term investments, bonds have a lot of disadvantages. For instance, unlike most annuities, bonds only pay out for a fixed period. You have no protection if you live longer than expected.
Bonds also have low rates of return. So low, in fact, that inflation or central bank moves can eat away at your investment. If you’re investing for retirement, you want a little more upside.
What Are Annuities?
Annuities are contracts with an insurance company where you invest money either as a lump sum or over time. The insurance company then pays you an agreed-upon amount over a predetermined length of time.
While these payments from the insurance company can start right away, most are deferred annuities. You also get to decide when you begin receiving payments, though you may be subject to an RMD (required minimum distribution) past a certain age.
And while some annuities do pay out over a term of 10, 20, or 30 years like a bond, many will continue to make payments until you pass away. Some will even continue making payments to a designated beneficiary.
What Are Fixed Index Annuities?
Fixed index annuities base a portion of your payout on a stock market index like the NASDAQ or S&P 500. These annuities are calculated to ensure a controlled amount of volatility, also called risk.
That means if the market is good, your payments will be higher. If the market is bad, though, the annuity structure still guarantees you a certain minimum level of income.
FIAs are very sophisticated these days, with many focused on targeting undervalued stocks. If the market is low, they change course to concentrate on blue chip stocks and bonds.
While you may not get the entire upside of a roaring bull market, you still get some of it while holding onto a low-risk financial product.
Advantages
If you’re looking to guarantee a certain amount of income for your entire retirement, fixed-index annuities are some of the best investments out there. They offer many of the advantages of an investment fund while controlling your risk.
The annuity structure also allows you to purchase additional benefits, or riders, for a certain fee. These riders can help your annuity income keep up with inflation or pay for things like long-term care.
And most importantly, you’ll receive annuity payments over your whole life.
Disadvantages
Annuities aren’t for everyone. There’s generally a set number of years, known as the surrender period, where you get hit with a heavy penalty for withdrawing money. This means younger adults with less money to cover financial emergencies may not want an annuity.
Annuities can also have hefty fees that eat into your returns. It pays to shop the annuity market with a professional like those at Annuity Associates.
The Bottom Line
So, what’s the deal with fixed index annuities versus bonds? Both have their place in a conservative investment strategy.
But if you’re looking to invest money for your retirement both safely and profitably, there’s nothing quite like a fixed index annuity.
Many people have learned about the power of using the Safe Money approach to reduce volatility. Our Safe Money Guide is in its 20th edition and is available for free.
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