What is the difference between using bonds in retirement versus annuities? The Wall Street Journal described income annuities as “super bonds”.
Within the backdrop of retirement planning, annuities are often compared to bonds and vice versa. They are different. It is important to know their differences in order to appreciate the superior qualities of an income annuity for retirement income purposes.
• A bond or a bond portfolio cannot provide guaranteed income for life.
• A bond or a bond portfolio does not guarantee results, of any kind.
• Bonds and bond portfolios have default risk that bondholders accept without any kind of insurance (General Motors is a recent example of worthless bonds that offered investors no recourse).
• Bonds are usually not redeemable early without an early withdrawal penalty.
The right annuity delivers security, peace of mind and simplicity:
1. Guaranteed income you cannot outlive, no matter what;
2. No principal loss, ever;
3. Market upside when markets are up; and
4. 100% liquidity from day one.
5. Backed by insurance companies with strict reserving regulations and state guaranty funds.
Below are powerful conclusions from one of the leading retirement scholars in the world, Professor Wade Pfau. According to Professor Pfau:
“The funds used to buy a fixed deferred income annuity should be viewed as a substitute for a bond investment when evaluating a holistic retirement portfolio.”
“Deferred Income Annuities (DIAs) are products offered by insurance companies that provide for steady guaranteed income payments. They can be used to pre-fund retirement spending over the entire retirement life cycle. DIAs are not market investments and as such do not fluctuate with market ups/downs.”
“Our findings suggest that a short deferral income annuity can both reduce the cost of funding retirement and provide important behavioral benefits to clients concerned about near retirement market performance.”
“Managing assets to create income becomes a significant challenge for the increasing percentage of Americans who suffer from dementia in old age. A retiree can reduce all of these risks through the purchase today of a guaranteed income stream in the future…”
“A Deferred Income Annuity can also be beneficial as insurance to protect against the risk of outliving assets either due to poor investment performance or reduced cognitive ability in old age.”
I hope you find these quotes from Professor Pfau to be validating. Using the right income annuities at the foundation of your retirement plan will simplify retirement planning with guaranteed results.
Please call me at 561-869-4500 or email me, Ted Bernstein, to continue our discussions for your specific needs.
Also published on Medium.