Securing your financial future doesn't have to be complicated. Annuities and bonds are practical options for growing your savings, and they’re easier to understand than they may appear.
In this article, we’ll explain the characteristics of annuities and bonds, their uses, and how they accomplish various financial goals.
An annuity is a contract between you and an insurance company that can provide you with a guaranteed and steady income stream. In exchange for consistent or lump sum investments, the insurance company will send you payouts based on an agreed-upon timeline.
The contract involves three participants:
Often, the owner and the annuitant are the same person, but that doesn’t always have to be the case. You can also purchase an annuity that provides payments to a loved one.
There are three main types of annuities to choose from:
Annuities help provide long-term financial security and can offer income for many years or even for life. Some also have optional add-ons called riders, which can include features like guaranteed income, market loss protection, or extra life insurance benefits for an additional cost.
Ultimately, annuities are a dependable way to grow and supplement your savings. Depending on which type you choose, these annuity contracts can offer guaranteed income, market growth, and tax advantages.
Bonds aren’t annuities — rather, they’re fixed-income investments that pay you regularly at a set interest rate. You pay a lump sum to buy one and can purchase them individually or as part of a fund. When you invest in a bond, you’ll know how long it will last, your interest rate, and when you’ll receive payments. If you hold the bond until it matures, you’ll regain its full value.
Here’s a list of the different types of bonds:
Understanding the differences between annuities and bonds can help you better decide which suits your financial goals. Here’s a comparison between these two investment strategies.
Liquidity refers to how quickly you can sell something for cash without affecting its market price too much. Long-term investments don’t need to be liquid, since you won’t need to access those for several years. But if you’re looking to generate a quick return, a more liquid account is a better choice. Here’s how that affects bonds and annuities.
Bonds are generally easy to sell if you need cash before they mature. Their price can change due to market conditions, so you may sell for more or less than you originally paid.
Generally, annuities aren’t very liquid, as you invest your money into them for a specific time. An annuity provides regular income, making it better for long-term financial planning rather than quick cash. You may also need to pay additional fees to take money out of an annuity before the end of its term.
But if you’re looking for faster payouts, an immediate annuity may suit your needs better. These contracts let you turn a lump sum into regular income in as little as one month.
Both annuities and bonds can provide a steady income, but their payout structures differ.
Bonds provide income through regular interest payments, usually twice a year. If you choose a fixed-rate bond, the interest rate stays the same, giving you a stable income stream. And variable-rate bonds adjust their interest rates based on market trends, meaning the amount of income you receive can change.
These investments are a good choice if you want short to medium-term income or more stability in your portfolio. If you hold a bond until it matures, you’ll get all your interest payments plus your original deposit back. But if you sell a bond before maturity, the amount you get depends on market conditions, which can make your returns less predictable.
Annuities offer a different approach to generating income. After you’ve made your contributions, payments begin. This makes them a popular option for long-term financial planning such as retirement.
The most predictable annuities are fixed, which provide reliable, steady payments. Some options provide income for life, which is one of the main reasons people are drawn to annuities, since they offer a sense of security.
However, not all annuities are fixed — variable annuities tie their payouts to investment performance, for instance, which means your income can go up or down based on market fluctuations.
Bonds and annuities have different tax treatments, which can affect your financial plan. Here are the differences between the two investments.
Both bonds and annuities have a wide range of term lengths available, depending on your needs. Typically, long-term investments are better suited to planning for the future. In contrast, short-term investments help investors save for more immediate goals, such as buying a house or building an emergency fund. Below, we’ll cover how bonds and annuities address term length.
Bond terms are highly flexible, ranging from a few months to 30 years. This range makes them suitable for all kinds of investment goals, regardless of how quick the returns are or how long you intend to invest.
Short-term bonds provide quick access to funds and are less affected by interest rate changes, making them a safer choice in volatile markets. But investors willing to wait longer will benefit from high interest rates on long-term bonds.
Similar to bonds, annuity terms last anywhere from 30 days to 30 years. The shortest term lengths available are for single premium immediate annuities (SPIAs). SPIAs allow you to pay a one-time fee to an insurance company and begin receiving payments almost immediately, generating a quick and reliable income stream.
Start by considering the risk level you’re comfortable with. Both bonds and annuities offer options for more or less risk — it depends on the insurer and contract type you choose. That said, because annuities provide greater contract flexibility, there’s more room to adapt your contract to your risk comfort level. For instance, you might choose a fixed annuity rather than a variable annuity for increased financial security.
Then factor in your financial needs. Bonds might be a good choice if you want a steady income for a short time or the option to reinvest later. They’re dependable, pay regular interest, and give you control over your investments.
Annuities are a great option for a wide range of needs. Whether you need an immediate income stream, a secure way to grow your funds, or steady payments for life, annuities can help. With so many types available, annuities are a smart addition to your financial plans.
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