This is a great question but it is difficult to answer briefly.
People may lump annuities and bonds together because, at a high level, both are vehicles that can be used to produce income. That said, they are completely different classes of assets:
- Bonds are fixed income while annuities are essentially insurance products.
- Bonds are not without risk. There is credit risk, inflation risk, reinvestment risk, etc.
- Annuities also come with credit risk, inflation risk (depending on the annuity), etc.
- Annuities can effectively provide protection against longevity risk--bonds cannot.
- Inflation is a key consideration with both bonds and annuities.
- Both bonds and annuities can be used to create income during retirement (or really any other period). However, annuity income can be guaranteed in perpetuity while bond income is generated for the term of the particular bond.
- A retiree would typically have some bonds or bond funds as part of their overall portfolio, but may also own an annuity which serves a different purpose. The trick is to understand what a person's financial profile and plan looks like and then create a portfolio of products that fits those objectives. That portfolio may very well include both bonds and annuities.
I will use this question as the basis for a forum topic that is under "General Q&A, Annuities versus Bonds." This link can be found here: http://www.annuitydigest.com/forum/annuities_versus_bonds. Please feel free to continue the conversation there. Under that section, I will also include a brief piece that discusses annuities (in particular a longevity annuity) versus zero coupon bonds.
Glossary:
Key Phrases:
FAQ Topics:
- Log in to post comments
