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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 different risks and benefits. These alternatives include bonds, certificates of deposit, retirement income funds, dividend-paying stocks and variable life insurance.

Annuities are among the safest options for long-term financial planning, 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 pay for long-term care.

But like any investment strategy, annuities carry some risk and may not be the best financial planning choice depending on your goals and situation.

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.

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 complexity, commissions and fees and taxation.

Annuities provide guaranteed income for a fixed period or life with many ways to customize your benefits and beneficiaries depending 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. Annuities generally are long-term contracts, and they may have early withdrawal penalties or fees if you want to receive funds ahead of or above your scheduled payment amounts.
  • You want a more aggressive investment strategy with relatively higher levels of risk. 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. “And like any other insurance policy that consumers own, it’s important for everyone to have enough insurance, but not too much,” says Moshe A. Milevsky, a finance professor at York University and managing director of the consulting firm PiLECo.

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 80 percent of pre-retirement income for living in retirement. Social Security retirement benefits replace about 40 percent of income after retiring. That leaves another 40 percent to be replaced by other sources.

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 funding 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 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, each of these investments is considered lower risk and offers regular income.


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

Bonds typically are considered the safest and most liquid investments. There are different types of bonds, including U.S. Treasuries, corporate and municipal bonds, with different yields depending upon the lender and interest rates.

While it is difficult to compare annuities to bonds, many experts say annuities are a better choice than bonds for generating income 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 earned, 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) 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 considered for shorter-term investments, and their interest is taxed annually, unlike annuities’ 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.

Type TaxationPrincipal protected Interest
Fixed AnnuityTax deferred growth Preset/guaranteed
Bond Interest income may be taxed or tax-free Most pay fixed rate of interest, but subject to interest rate risk
Bond Interest income taxedPreset/guaranteed

Retirement Income Funds

A retirement income fund (RIF) is a mutual fund that takes a conservative investing approach. These funds typically are a mix of fixed-income securities and equities with the goal of consistency rather than maximum gains. RIFs sometimes also go by the name managed payout funds.

Proponents of RIFs generally like their simplicity and all-in-one offerings. They are designed to produce steady returns with regular payouts and have higher yields than more conservative annuity alternative strategies like CDs or bonds alone.

But 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 portions of a company’s earnings that investors regularly receive. They are a type of passive income, and although they come in many forms, dividend-paying stocks tend to be more reliable than growth stocks.

How Dividend-Paying Stocks Work

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

Still, FINRA says dividend-paying stocks historically outperform other stocks during market volatility and downturn, because they are perceived as “safer” investments. Experts and financial advisors also credit dividend-paying stocks as an investment tool to protect against inflation.

Alternatives to Variable or Indexed Annuities

When it comes to annuities, variable or indexed annuities carry a higher risk than fixed annuities because at least a portion of your income is tied to market performance through investment accounts. Similarly, the most popular annuity alternative to variable or indexed annuities also functions like a mutual fund but can provide minimum guarantees.

Variable Life Insurance

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

Variable life insurance policies also have cash values attached 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). You also may be able to put a portion of your premiums into a fixed account that provides a guaranteed minimum.

Things to Consider
  • Whether you can pay the fees and expenses to afford the policy. Some fees could increase over time, and if you cannot pay, your policy may terminate.
  • What returns you will depend on, as their performance is tied to the investment options you choose, and you could possibly lose money.
  • The financial strength of the insurance company.
  • If other special features offered under the policy could fit your needs and could be purchased more cheaply separately.

The federal and state tax rules that apply to these insurance policies can be complicated, the U.S. Securities and Exchange Commission also cautions. That is why it is a good idea to consult a tax advisor before purchasing a policy.

A Combined Approach

With any financial planning, you will want to consider all your options before making any final decisions about the right savings strategy for you.

Most financial planning is not “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.

Please seek the advice of a qualified professional before making financial decisions.
Last Modified: October 4, 2021

24 Cited Research Articles

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