The idea of retirement is refreshing and endlessly appealing. No more alarm clocks, no more suits and ties, no more cubicles closing you in for 8 hours a day…the list goes on and on.
Even for people who love their jobs, retirement can be an exciting goal to work toward. While the prospect of retiring from work and focusing on doing exactly what you love every day is thrilling, the routes to financing that reality are vast and varied.
In the majority of cases, it’s not possible to simply save up enough throughout your career to retire comfortably. For most Americans, it’s essential to have a diverse income portfolio in place that will provide flexibility when there’s no longer a regular paycheck coming your way.
While Social Security benefits are helpful, they only cover a portion of what’s required to make the most of retirement. That’s where the purchase of annuities and bonds comes into play.
So what’s the difference between annuities and bonds? How can they help? Let’s take a closer look.
They Require Different Issuers
Both annuities and bonds are dedicated stream-of-income strategies. They’re structured to achieve different goals and are issued in quite dissimilar ways.
Annuities and bonds are similar in outcome. To earn a predictable income for a set period of time, it’s necessary to pay a one-time, lump sum out to a specific issuer. Insurance companies are in charge of issuing annuities, while large companies and the government handle bonds.
While payments from the issuer are guaranteed upfront for both annuities and bonds, there’s always a credit risk involved in this process. People who invest in annuities and bonds have to evaluate whether an insurance company, a large corporation, or the federal government is less risky in terms of creditworthiness, both today and in the future.
Your Relationship to Your Issuer Isn’t the Same
One of the most evident differences between annuities and bonds is the buyer’s relationship to the issuer they select. When you purchase a bond, you’re considered to be the lender. Those who opt for annuities become part of a contract crafted by the issuing insurance company.
Typically, annuities are purchased with the goal of earning income for life. That said, the contracts they’re established under tend to be slightly flexible, giving buyers a chance to modify provisions before they’re finalized.
Alternatively, bonds eliminate the contract factor but leave no wiggle room for changes to be made. Simply put, the buyer loans money to a corporation or the government, and in return, they receive a fixed rate of interest for as long as that bond is valid. This may not necessarily be for life.
They Offer Different Income Rates
Many buyers are looking at income potential when they’re deciding whether to go with annuities or bonds. While annuities are generally considered to provide the chance for greater earnings, there are some specifics involved that can change things.
As is the case for so many financial scenarios, the distinction comes down to the question of taxes. Where bonds are entirely taxable, annuities can only be taxed on their premium payment. Therefore, annuities are likely to grow at faster after-tax rates.
Before you jump at the tax facts, it’s important to consider that annuities are not as easy to sell as bonds when you’re looking to switch things up. The market is far less flexible when it comes to annuity sales, whereas bonds are sold and exchanged daily.
Predictability Makes a Difference
Creating sources of reliable income for retirement that you can count on for the foreseeable future is the key to success in your golden years. To that end, you’ll want to look at the predictability and growth of annuities versus bonds before you make a final decision.
As interest rates fluctuate in the marketplace, so does the value of your annuities and bonds. The advantage that annuities have over bonds in this regard is that they aren’t priced daily, so they could be considered a bit more dependable.
On the other hand, bonds, which are so easily accessible, move fluidly alongside market fluctuations. If interest rates rise, you can count on your bonds changing too. This can make it tricky to plan long-term, especially when interest rates are following more volatile trends.
Which Should You Choose?
Picking between annuities and bonds starts with an evaluation of your preferred timeline. If you’re fairly close to retirement and need a guarantee that additional income will be in place, annuities are the way to go.
If you have more time to work with and are willing to take a little bit more of a risk, bonds will do the trick. These provide an accessible way to generate income over a set period of time.
For some buyers, it’s more of a question of control. Do you want to have a set contract or would you rather fill the shoes of a lender? Your answer to this question can be a clear indicator of which route is best for you.
It’s also important to look at the Social Security benefits that you’ll be expecting and how that amount will fit in with your financial goals in retirement. If you have the freedom to wait to collect benefits until you’ve reached full retirement age, you may not need to invest so much in annuities or bonds.
When life circumstances push you toward collecting on Social Security benefits earlier than your full retirement age, you’re going to see a significant decrease in money coming into your bank account monthly. In some cases, this can even mean up to 30% less coming your way.
When early benefits collection can’t be avoided, annuities and bonds can make up the very important financial difference you’ll depend on. Even if you’re confident in your Social Security benefits, these added income streams can provide the peace of mind you’ll want if things take a turn towards the unexpected.
There are so many helpful income-generating options out there, but if you don’t take the time to learn about them, you’ll miss out on what could be an amazing retirement. Whether you go with annuities or bonds, just make sure that you’re educating yourself with the information that’s going to keep you living the good life for years to come.
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