Alternatives to Annuities

Annuities are not the only financial planning strategy for generating retirement income. There are several alternatives to both fixed and variable or indexed annuities, each with its own associated risks and benefits. These alternatives include bonds, certificates of deposit, retirement income funds, dividend-paying stocks and variable life insurance policies.

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    Managing editor Emily Miller is an award-winning journalist with more than 10 years of experience as a researcher, writer and editor. Throughout her professional career, Emily has covered education, government, health care, crime and breaking news for media organizations in Florida, Washington, D.C. and Texas. She joined the team in 2016.

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  • Updated: June 5, 2023
  • 8 min read time
  • This page features 15 Cited Research Articles
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APA Miller, E. (2023, June 5). Alternatives to Annuities. Retrieved June 5, 2023, from

MLA Miller, Emily. "Alternatives to Annuities.", 5 Jun 2023,

Chicago Miller, Emily. "Alternatives to Annuities." Last modified June 5, 2023.

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Key Takeaways

  • Annuities are one of the safest options for long-term or retirement planning, but they may not be the best-suited option for every person.
  • Some may be comfortable with higher-risk alternatives with potentially greater returns or may need quick access to assets for emergencies.
  • Alternatives to fixed annuities include bonds, certificates of deposit, retirement income funds and dividend-paying stocks.
  • Alternatives to variable annuities include variable life insurance.

Annuities are among the safest options for long-term financial planning. They provide a reliable and steady stream of regular payments and offer an attractive choice for people looking to fund retirement, provide for loved ones or even pay for long-term care.

But, like any investment strategy, annuities carry some risk and may not be the best financial planning choice for everyone.

Fortunately, there are several sound alternatives to annuities that also generate income. These include bonds, certificates of deposit, retirement income funds, dividend-paying stocks and variable life insurance policies.

Wendy Swanson, Retirement Income Certified Professional™, explains some of the drawbacks of annuities.

Why Might an Annuity Not Work for Some People?

While there are many reasons to buy annuities, some consumers have common concerns about annuities’ disadvantages, including their complexity, accompanying commissions and fees and taxation rules.

Annuities provide guaranteed income for a fixed period or for life, and they usually offer high flexibility in that they offer the ability to customize benefits. The specific terms of an annuity depend on the type of annuity you purchase.

Still, an annuity might not work for you if:

  • You need to quickly access funds for large or emergency expenses. Generally, annuities are long-term contracts, and they may have early withdrawal penalties or fees.
  • You want a more aggressive investment strategy with more return potential. Unlike other types of investments, annuity contracts transfer market risk to the insurance company. Fixed annuities, for example, provide a guaranteed rate of return regardless of market volatility. For younger investors, with longer time horizons and higher risk tolerances, annuities might not be the best investment strategy.
  • You are sure you already have other funds to cover all your income needs during retirement. AARP shares four factors to help you determine how much you will need after you retire. If your existing sources of assured income will cover your expenses for the rest of your life, then you may not need an annuity.

Remember that annuities are insurance products.

“Like any other insurance policy that consumers own, it’s important for everyone to have enough insurance, but not too much,” Moshe A. Milevsky, a finance professor at York University and managing director of the consulting firm PiLECo, says.

If you already have many other forms of guaranteed income, like a large pension from work or ample income from Social Security, Milevsky advises that an annuity might not be needed.

Did You Know?

On average, people need to replace about 70% to 85% of pre-retirement income for living in retirement in 2023. Social Security retirement benefits replace about 40% of income for “medium” average earnings.

Source: AARP

Interested in Buying an Annuity?

Learn about the different types of annuities and find out which one is right for you.

Best Alternatives to Annuities

Beyond annuities, there are several alternatives to consider for peace of mind and financial security. Like annuities, these alternatives come in many shapes and sizes depending on your investment goals and risk tolerance. They also come in fixed and variable options.

Safety-First Retirement

Many annuity alternatives still fall within the safety-first approach to retirement planning made popular by economist Zvi Bodie. This approach calls for prioritizing the funding of basic needs over discretionary spending. Because of that, Bodie and other safety-first proponents advise people to cover their essential retirement expenses with guaranteed sources of money, including lifetime annuities, Social Security, a pension, bonds and certificates of deposit.

Wade Pfau, a professor of retirement income at The American College of Financial Services, describes this approach as first building a “safe and secure income floor” for your entire retirement. Only then, he advises, should people consider more volatile assets in their retirement portfolio.

Pro Tip

Cover all your essential retirement expenses with guaranteed sources of money, including lifetime annuities, Social Security, a pension, bonds and certificates of deposit.

Alternatives to Fixed Annuities

Some of the most popular alternatives to fixed annuities are bonds, certificates of deposit, retirement income funds and dividend-paying stocks. Like fixed annuities, these investments are regarded as relatively low-risk and income-oriented.


A bond is most often described as an I.O.U. Essentially, it’s a loan that you make to a borrower (usually a corporation or government) in return for a specified rate of interest and a promise that you will receive back the principal after a set time.

Bonds are generally considered to be safe and liquid investments. There are different types of bonds, including U.S. Treasuries and corporate and municipal bonds, with differing yields depending on the creditworthiness of the lender and the duration of the loan term.

While it is difficult to compare annuities to bonds, many experts say annuities are a better choice than bonds for generating income. This is because research shows they tend to outperform bonds in retirement portfolios.

Did You Know?

Interest rate changes can affect a bond’s value, and bond prices decline when interest rates rise.

Certificates of Deposit

A certificate of deposit (CD) is a special type of savings account offered by a bank or credit union with higher interest rates than traditional savings accounts. In exchange for receiving the interest, you agree not to access the account for a set amount of time.

CDs are considered a very safe investment because they are backed by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 for individual accounts. Like fixed annuities, CDs have a guaranteed rate of return and guarantee on the principal.

But comparing annuities to CDs is not apples-to-apples. Typically, CDs are seen as shorter-term investments, plus interest is taxed annually. Conversely, annuities are longer-term investments that offer tax-deferred growth.

Pro Tip

The Consumer Financial Protection Bureau advises you to select your CD maturity date based on your expected needs. If you remove money ahead of this date, you could pay penalties or forgo interest earnings.

How Fixed Annuities Compare to Bonds and CDs

Here is how fixed annuities compare with these two annuity alternatives.


Taxation Principal protected


Fixed Annuity Tax deferred growth



Interest income may be taxed or tax-free

Most pay fixed rate of interest, but subject to interest rate risk

Interest income taxed Preset/guaranteed

Retirement Income Funds

A retirement income fund (RIF) is a mutual fund that takes a conservative investing approach. Typically, these funds hold both fixed-income securities and equities, and they prioritize consistency over growth. RIFs are sometimes referred to as managed payout funds.

Proponents of RIFs like their simplicity and all-in-one offerings. They are designed to produce regular payouts and have higher return potential than more conservative annuity alternative strategies like CDs or bonds.

However, because they are exposed to market risk, RIFs do not guarantee returns. Additionally, to meet your payout schedule, some fund managers may be allowed to access your principal.

Pro Tip

While retirement income funds (or managed payout funds) can offer more flexibility than annuities, they do not offer payment guarantees.

Dividend-Paying Stocks

Dividend-paying stocks are equity securities that distribute earnings regularly. They offer a fairly reliable source of passive income to investors, along with some growth potential.

How Dividend-Paying Stocks Work

Companies that offer dividends are usually well established, but FINRA says that stability comes with a trade-off. These companies are unlikely to “experience blockbuster growth,” and their shares are “less likely to see big jumps.” Even with this perceived stability, dividend-paying stocks do not guarantee returns.

That said, dividend-paying stocks exhibit much less volatility than growth stocks, and they perform relatively well during market downturns.

Alternatives to Variable or Indexed Annuities

Variable and indexed annuities carry a higher risk than fixed annuities because a portion of their income stream is tied to market performance. Similarly, the most popular alternatives to variable or indexed annuities also provide a minimum guarantee with some upside potential.

Variable Life Insurance

Like an annuity, a variable life insurance policy is a contract with an insurance company that allows for tax-deferred growth. It is intended to provide income for your family or other beneficiaries upon your death.

Variable life insurance policies also have cash values that vary according to the policy’s fees and expenses, the premiums you pay and how that money performs in investment accounts (typically mutual funds).

Things to Consider

  • Ensure that you can pay the fees and expenses charged to maintain the policy. Some fees could increase over time. If you cannot pay them, your policy could terminate.
  • Understand the risk-return tradeoff associated with your investment selections. Higher returns necessitate the assumption of greater risk and a higher possibility of losing money.
  • Assess the financial strength of the insurance company. If it goes under, your investment could be lost.
  • Determine whether special features offered under the policy could be purchased more cheaply separately.

Source: U.S. Securities and Exchange Commission

The U.S. Securities and Exchange Commission cautions that the federal and state tax rules that apply to these insurance policies can be complicated. Because of this, it’s wise to consult a tax advisor before purchasing a policy.

A Combined Approach

As with any financial planning endeavor, consider all options before making any final decisions about the right savings strategy for you.

Most financial planning exercises do not entail “all-or-nothing decisions,” Milevsky says. “You don’t have to go ‘all in’ and can diversify across various products — that is some annuity, some not.”

For many people, the best solution might be a combination of several income-producing investments to meet financial goals and plan for a secure retirement.

FAQs About Annuity Alternatives

What are the best alternatives to an annuity?

Depending on your strategy for retirement income, alternatives to annuities include bonds, dividend-paying stocks, CDs, retirement income funds and variable life insurance.

Why do people buy annuities?

Among the reasons to buy annuities is the fact that they provide long-term growth and a steady income stream with relatively low risk.

Who are annuities a good investment for?

An annuity may be a good investment choice for people already heavily invested in stocks or bonds. Annuities provide added diversification by providing an income stream that’s (typically) not dependent on stock market performance.


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Last Modified: June 5, 2023

15 Cited Research Articles writers adhere to strict sourcing guidelines and use only credible sources of information, including authoritative financial publications, academic organizations, peer-reviewed journals, highly regarded nonprofit organizations, government reports, court records and interviews with qualified experts. You can read more about our commitment to accuracy, fairness and transparency in our editorial guidelines.

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