Annuity Alternatives: Diversifying Your Retirement Income Portfolio

Annuities can be an effective and worthwhile financial product in retirement, providing a guaranteed stream of payments so you never have to live with the fear of outliving your savings. But they are not the only investment avenue available to retirees and do not make sense for everyone. It is important to consider all your options.

Christian Simmons, writer and researcher for RetireGuide
  • Written by
    Christian Simmons

    Christian Simmons

    Financial Writer

    Christian Simmons is a writer for RetireGuide and a member of the Association for Financial Counseling & Planning Education (AFCPE®). He covers Medicare and important retirement topics. Christian is a former winner of a Florida Society of News Editors journalism contest and has written professionally since 2016.

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  • Edited By
    Lamia Chowdhury
    Lamia Chowdhury, editor for RetireGuide.com

    Lamia Chowdhury

    Financial Editor

    Lamia Chowdhury is a financial content editor for RetireGuide and has over three years of marketing experience in the finance industry. She has written copy for both digital and print pieces ranging from blogs, radio scripts and search ads to billboards, brochures, mailers and more.

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  • Financially Reviewed By
    Toby Walters, CFA®
    Toby Walters, CFA

    Toby Walters, CFA®

    Chartered Financial Analyst and Paraplanner

    Toby Walters, CFA®, has over 25 years of financial research experience. With a knowledge and understanding of researching and analyzing financial data, he has developed a unique and experienced viewpoint on money matters. He has been a chartered financial analyst since 2003, and most recently a portfolio analyst and paraplanner.

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  • Published: March 16, 2023
  • Updated: July 6, 2023
  • 11 min read time
  • This page features 5 Cited Research Articles
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A qualified expert reviewed the content on this page to ensure it is factually accurate, meets current industry standards and helps readers achieve a better understanding of retirement topics.

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How to Cite RetireGuide.com's Article

APA Simmons, C. (2023, July 6). Annuity Alternatives: Diversifying Your Retirement Income Portfolio. RetireGuide.com. Retrieved June 17, 2024, from https://www.retireguide.com/annuities/buy/alternatives/

MLA Simmons, Christian. "Annuity Alternatives: Diversifying Your Retirement Income Portfolio." RetireGuide.com, 6 Jul 2023, https://www.retireguide.com/annuities/buy/alternatives/.

Chicago Simmons, Christian. "Annuity Alternatives: Diversifying Your Retirement Income Portfolio." RetireGuide.com. Last modified July 6, 2023. https://www.retireguide.com/annuities/buy/alternatives/.

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Key Takeaways
  • Annuities can be an effective retirement investment, but they don’t make sense for everyone.
  • Common alternatives to opting for an annuity can include 401(k) plans, investing in bonds, CDs or REITs, or maximizing Social Security benefits.
  • Having a firm understanding of your financial situation and retirement goals can help to ensure you make the right investment decisions.

Importance of Considering Annuity Alternatives

Annuities do not make sense for everyone. While they can be an effective investment to keep you financially secure in retirement, they are not always the best option available.

Having a strong understanding of your financial situation and being aware of what financial goals you need to attain to secure a safe retirement will help you determine what products may make the most sense for you.

There are many different investment vehicles that may be more effective for your situation than buying an annuity.

There are also avenues that you may find to be solid complementary options to your main retirement savings.

Although alternatives to annuities share some similarities such as low risk and payback of principal, none have the ability to guarantee income for life.
Toby Walters, CFA
Toby Walters Chartered Financial Analyst and Paraplanner

Annuity Alternatives

There are many alternatives to annuities. Some may accomplish similar goals to annuities while others may be very different.

Common Annuity Alternatives
  • Bonds
  • CDs
  • Retirement Income Funds
  • Stocks
  • REITs

The easiest way to sift through your options is to have a firm understanding of your situation and what you will need to save effectively.

Bonds

Bonds are a potential low-risk way to help steadily build up your retirement savings. They are often available through the U.S. government but can be purchased from private companies as well.

According to the U.S. Securities and Exchange Commission, bonds essentially involve lending money to the issuer, and getting paid interest on the bond over time.

After the bond matures, the principal is returned along with the interest.

It’s a straightforward and relatively low-risk way to bolster your savings, even if the returns are generally not dramatic.

Certificates of Deposit

Certificates of deposit, or CDs, are similar to bonds in some ways.

They generally involve investing money into the CD and agreeing to leave the money locked in for a set amount of time in exchange for a set interest rate.

You cannot touch the money you’ve placed into the CD during term length, which can stretch as long as multiple years. Then, after the period has passed, the principal along with its interest is returned to you. A longer term typically correlates with a higher interest rate.

CD interest rates are generally modest, but they can be an easy way to grow extra cash instead of leaving your money to sit in a bank account.

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401(k) Plans

A 401(k) is a common savings plan that is available through employers.

The plan gives you the opportunity to set aside some of your income to your retirement savings, so that it can grow in value over time and support your retirement lifestyle.

401(k) plans come with the added benefit that many employers will match some of your contributions, giving you the chance to grow your cash even more.

The money set aside in your plan can be invested, helping it grow significantly over time.

One drawback when compared to annuities, however, is that a 401(k) does not guarantee lifetime income. Your savings are finite and can be exhausted in retirement.

Pensions are plans provided through employers that give you access to income after you retire.

Retirement Income Funds

Like annuities, retirement income funds offer you a path to creating a stream of income for yourself in retirement.

Retirement income funds essentially work like an investment. The money you put in is invested into things like stocks and bonds.

The earnings of those investments are paid back out to you periodically.

While retirement income funds offer valuable payments, one drawback to be aware of is the lack of predictability.

Since the payments are tied to the earnings of investments, their value can vary.

Drawdown Strategies and Risks

A drawdown strategy generally refers to the plan you develop on how you are going to withdraw your current savings.

Saving for retirement is important, but organizing a way for those savings to last is just as critical.

Depending on how successfully you have saved for your retirement, you may find that something like an annuity is not necessary and that you can instead develop an effective drawdown strategy to last you through retirement.

But there is inherent risk taking this path since, unlike with an annuity, your funds will not automatically last through retirement.

If you calculate wrong or spend more than you anticipated, you can run out of money.

Dividend-Paying Stocks

Another way to generate income for retirement is to invest in stocks. This path can potentially be very lucrative if you invest wisely and, unlike other options, is a potential path to growing money quickly.

You have the chance of earning high rewards in exchange for high risk.

But due to the volatility of investing in stocks, it often makes sense to include this as just a part of your retirement strategy rather than relying on it solely.

Many financial plans and products, including annuities, can include stock investments as part of their makeup.

Real Estate Investment Trusts (REITs)

Real Estate Investment Trusts, or REITS, are another alternative worth considering. According to the U.S Securities and Exchange Commission, REITs offer a path to investing in real estate at a high enough level to result in legitimate income.

REITs often involve commercial real estate, and investing in a trust allows you to have a share in the profits of those properties.

Like other alternatives, REITS may make more sense as a way to supplement or diversify your retirement strategy rather than being the centerpiece of it.

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Maximize Social Security Benefits

Maximizing your Social Security benefits can be another effective alternative to purchasing an annuity.

The age that you choose to begin taking Social Security can have a massive impact on how much you will receive. Beginning payments when you are past full retirement age can make a huge difference and provide you with significantly more income in retirement.

One strategy to maximize your benefits if you retire before your full retirement age is to plan to dip into your main savings more heavily in the early years of retirement, serving as a bridge to the time you can receive your maximum Social Security benefits.

Choosing the Right Retirement Income Strategy

A huge part of choosing the right retirement income strategy is having a strong understanding of your financial situation.

The first step in this process is to understand how much you need to save. Determining the standard of living you need in retirement and how much savings you need to make that happen will help conclude what strategies make the most sense.

You may find that an aggressive strategy is necessary to meet your goals or that you will need to heavily diversify your savings outlets and invest in numerous different avenues.

You may also find that you have the time or resources to opt for a conservative strategy and add additional investments such as bonds or CDs.

But it all comes back to understanding what you need to save. It can be risky to not know what your end goal is or how much money you will need in retirement.

Factors To Consider

There are important factors to consider when determining your retirement strategy and whether annuities should be a part of it.

Factors To Consider When Setting a Retirement Strategy
  • Age and life expectancy
  • What your goals are
  • Risk tolerance
  • Taxes

One main area to consider is your age and life expectancy. If you are in poor health, have a family history of serious conditions or do not expect to have a long retirement, then longer-term products like annuities may not make sense.

You should also consider what your retirement goals are. Do you intend to have a similar or higher standard of living in retirement than you do now? Or do you plan to wind down and spend less money in your post-work life?

Understanding your risk tolerance is a key factor as well. Some investments are much riskier than others. Taking inventory of what you do and don’t have an appetite for can help to narrow down your options.

Your tax situation is also critical. Some investment strategies emphasize tax deferral. This can be a valuable tool if it makes sense for your situation.

Retirement Income Planning Tools and Resources

There are many retirement planning income tools and resources that can help you make the best choice for your personal situation.

For quick and basic questions, there are many online calculators that are easily accessible. These can help give you a basic snapshot of where your savings are at or where they need to be for you to achieve your retirement goals.

When dealing with more serious questions or setting a legitimate strategy, financial advisors can also be an invaluable resource.

They can help to check that you are not making any serious mistakes, guide you in the direction that makes the most sense and serve as a guardrail against any potential pitfalls that you may not recognize on your own.

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Pros and Cons of Annuities

There are pros and cons to opting for an annuity as part of your retirement strategy, and whether it makes sense will depend on your goals and personal circumstances.

Advantages of Annuities

The main advantage of purchasing an annuity is guaranteeing yourself an income stream that can last the rest of your life. Outliving your savings is a major concern for many seniors and is entirely possible through traditional savings vehicles such as a 401(k).

Annuities also allow for savings to be tax deferred, giving you the opportunity to maximize your earnings and potentially take advantage of a lower tax bracket when you begin receiving payments.

The predictability of annuity payments are another major draw. While you may need to regularly adjust or keep track of withdrawals from finite savings vehicles, annuity payments can provide stability.

Disadvantages of Annuities

While there are many pros to buying an annuity, there are drawbacks to be aware of as well. One significant con is that annuities typically include high fees and expenses. These are often more common and more numerous with annuities than with other financial products.

Depending on the type of annuity you purchase, there is also an inflation risk. If you are locked into set payments, their value may decrease over time as inflation rises.

It can also be difficult to get money out of an annuity once you have put it in. Say that you invested a nest egg into an annuity but then need that money back due to an unexpected financial emergency. Once it is annuitized, it may be difficult or impossible to do so.

Frequently Asked Questions About Annuity Alternatives

What are some of the most common annuity alternatives?
There are many alternatives to an annuity when it comes to retirement savings. Some of the most common options are 401(k) plans, IRAs or investing in bonds and CDs.
How can you make sure your retirement income strategy is tax efficient?
A huge part of building a tax-efficient retirement strategy is understanding when it is most advantageous for you to pay taxes. Many retirement products include tax deferral as an option, which can be valuable in some circumstances.
How can you ensure that your retirement income strategy aligns with your estate planning goals?
You can ensure that your retirement strategy matches with your estate planning goals by having a strong and thorough understanding of your financial situation. Speaking to an advisor can help as well.
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Last Modified: July 6, 2023
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5 Cited Research Articles

  1. U.S. Securities and Exchange Commission. (2023, February 26). Bonds. Retrieved from https://www.investor.gov/introduction-investing/investing-basics/investment-products/bonds-or-fixed-income-products/bonds
  2. Lee, J. (2021, March 24). How 401(k) Accounts Killed Pensions to Become One of the Most Popular Retirement Plans for U.S. Workers. Retrieved from https://www.cnbc.com/2021/03/24/how-401k-brought-about-the-death-of-pensions.html
  3. U.S. Department of Labor. (n.d.). Retirement Plans Benefits and Savings. Retrieved from https://www.dol.gov/general/topic/retirement
  4. U.S. Securities and Exchange Commission. (n.d.). Real Estate Investment Trusts. Retrieved from https://www.investor.gov/introduction-investing/investing-basics/investment-products/real-estate-investment-trusts-reits
  5. U.S. Securities and Exchange Commission. (n.d.). Variable Life Insurance. Retrieved from https://www.investor.gov/introduction-investing/investing-basics/investment-products/insurance-products/variable-life