Fixed Annuities vs Bonds
Choices are endless when it comes to investment planning, but when planning to invest on retirement plans, people are usually faced with this challenging question: is it better to invest a portion of my assets in fixed annuities or bonds? These are two types of investments that present different yields and outcomes.
Fixed Annuities and Bonds Defined
When people invest with an insurance company, they contribute to what is called “Annuity”. The term annuity refers to income earned from an investment and paid in a series of fixed regular payments. When insurance company guarantees the principal and pays the interest in a series of fixed payments, the payment received is called Fixed annuities. Fixed annuities generally do not earn a high return, but they are a conservative and stable form of investment.
Bonds are issued by a government or corporation in order to raise money. Corporations may need money or capital to expand while government may need the capital to build more infrastructures or implement more social programs. To acquire the needed or required capital, they release these so called bonds to the public. Thousands of investors then throw in a portion of the capital needed. In return, investors receive bonds. But how do investors make money from the bonds? These investors are more or less just loaning the government or corporation a sum amount of money. The certificate that is issued out of it to show how much was loaned at what interest rate is what you call the “bond”. Investors make money out of the interest earned from loaning the sum amount. Since rate is predetermined, investors received a fixed amount on a certain period of until the loan matures. Maturity of the loan could range from one to 30 years.
Much like the Fixed Annuities, Bonds are fixed-income securities and investors know the exact amount of cash they will receive if they hold the security until its maturity. Another similarity is both products have an end date. Bonds have a maturity date and annuities have an annuity date. However, if an annuity is in the distribution phase (paying out income), it can continue for the owners lifetime.
Which is which, Fixed Annuities or Bonds?
When preparing for retirement, bonds and annuities can both offer a comparable income stream and tax advantages. Depending on what the actual needs are of each individual, fixed annuities or bonds, each can offer some good investment returns. Fixed annuities, for example, will make the most sense for people who are worried about living longer than their income and do not have a large nest egg for retirement. Bonds, on the other hand, will make the most sense for people who just want extras because they have extras to spare and not worry about living to the minimum on their retirement. If one is a cautious investor who wants to go for a lower rate, or simply wants a guaranteed retirement income, Fixed Annuities are a better choice.
Nevertheless, below is a short and quick guide to choosing between Fixed Annuities and Bonds:
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Annuities are best suited for long term investors. Any withdrawal prior to age 59 ½ is subject to a 10% tax penalty as well as regular income tax. Annuities often also have a surrender schedule, meaning that withdrawals may be subject to a penalty by the insurance company if not left in for a predetermined amount of time. Any guarantees on principal invested is based upon the claims paying ability of the underlying insurance company.