When it comes to saving for retirement, youâve got a lot of options to consider. Which savings options make the most sense for you will depend on your timeline, your goals and your risk tolerance.
As you approach (or are in) retirement, you may be looking for more low-risk options, like an annuity or a certificate of deposit (CD).
Read on for some help in understanding the differences and similarities between annuities and CDs so you can decide whether oneâor bothâbelongs in your portfolio.
Are you thinkin’ about retirement and wondering if annuities are really all they’re cracked up to be? You’re not alone! As someone who’s spent years helping folks figure out their retirement strategies I can tell ya that annuities aren’t always the golden ticket that insurance salespeople make them out to be.
In fact, there are several alternatives that might serve you WAY better, depending on your situation Let’s dive into what’s actually better than an annuity and why you might want to consider these options instead
Why Many Financial Experts Are Skeptical About Annuities
Before we jump into the alternatives, let’s be real about annuities for a sec. While they promise guaranteed income (which sounds awesome), they come with some serious drawbacks:
- You lose 100% control of your principal immediately
- High fees and commissions that eat into your returns
- Lack of liquidity – your money gets locked up
- Fixed payments that don’t keep up with inflation
- Complicated contracts with confusing terms
As one financial advisor put it, “Any salesman who represents an annuity as an investment or pretends that the payment is a return on your investment is being fraudulent.” Harsh words, but important to consider!
7 Better Alternatives to Annuities for Retirement Income
So what should you consider instead? Here are 7 options that might serve you better:
1. A Properly Invested Portfolio with Safe Withdrawal Rates
This is arguably the BEST alternative for most people. Instead of handing over your money to an insurance company, maintain control of your assets with a diversified portfolio.
How it works:
- Build a portfolio based on your risk tolerance
- Follow age-appropriate safe withdrawal rates (around 4-4.5% for someone in their mid-60s)
- Increase withdrawals with inflation
- Maintain control of your assets throughout retirement
For example, with $234,000 (the cost of a typical annuity), a 66-year-old could withdraw about $10,366 annually (4.43%) and increase this amount with inflation each year, with an 80% chance of maintaining this income until age 100.
The best part? You keep control of your money and any leftovers go to your heirs or favorite charity!
2. Certificates of Deposit (CDs)
If safety is your primary concern, CDs offer a solid alternative to annuities.
Advantages:
- FDIC-insured up to $250,000 ($500,000 for joint accounts)
- Higher interest rates than regular savings accounts
- Shorter terms and lower early withdrawal penalties than annuities
- More liquid and flexible
I’ve seen many retirees create “CD ladders” by staggering maturity dates to provide regular income while maintaining access to their money. Smart strategy!
3. Government and Municipal Bonds
Bonds, especially U.S. Treasury bonds, offer safety while providing regular income.
Why they’re better than annuities:
- Provide guaranteed return of principal plus interest
- Government bonds are backed by the U.S. government
- Municipal bonds often offer tax advantages
- More flexible – can be sold if needed
One of my clients recently shifted from considering an annuity to building a bond portfolio and told me, “I sleep better knowing I can access my money if I need to.”
4. Retirement Income Funds (RIFs)
These are professionally managed mutual funds designed specifically for retirees.
Benefits include:
- Regular, predictable distributions
- Professional management
- Opportunity for asset growth
- More flexibility than annuities
- Ability to adjust income as needed
Unlike annuities, RIFs don’t lock up your money, and you can benefit from market growth while still getting regular income.
5. Dividend-Paying Stock Funds
For those willing to accept a bit more risk for potentially higher returns, dividend stocks offer an excellent annuity alternative.
Why consider dividend stocks:
- Regular income through quarterly dividends
- Potential for dividend growth over time (helps fight inflation!)
- Capital appreciation possibilities
- Liquidity – can sell shares if needed
I remember when my uncle switched from an annuity to dividend stocks. Over 10 years, his income actually INCREASED because many companies raised their dividends annually, while his annuity payment would have stayed flat.
6. Real Estate Investment Trusts (REITs)
REITs allow you to invest in real estate without the headaches of being a landlord.
Advantages over annuities:
- Required to pay out at least 90% of taxable income as dividends
- Potential for capital appreciation
- Provides portfolio diversification
- Trades on major exchanges (easy to buy and sell)
- May provide inflation protection (as property values and rents rise)
7. A Mixed Approach
In my experience, the best strategy isn’t putting all your eggs in one basket. A combination of the above alternatives often works best.
Example mix:
- 40% in a diversified stock portfolio for growth
- 30% in bonds for stability
- 15% in dividend stocks for income
- 10% in REITs for diversification
- 5% in CDs for emergency liquidity
The Math: Why Annuities Often Disappoint
Let’s look at some real numbers. Say you’re considering a $260,000 immediate fixed annuity that promises $1,300 monthly ($15,600 annually) for life.
Sounds like a 6% return, right? WRONG!
For the first 16 years and 8 months, the insurance company is just giving you your own money back. The internal rate of return (IRR) only reaches:
- 0% after 16.7 years
- 1.35% by age 85 (average life expectancy)
- 4.77% if you live to 100 (barely keeping pace with inflation)
- Never reaches 6% even if you live to 150!
Meanwhile, historical stock market returns average 10-12% and bonds 7-8%. That means your properly invested portfolio could have quadrupled while the insurance company is just returning your own money!
Who Should Still Consider Annuities?
Despite everything I’ve said, annuities might still make sense for some people:
- Those with extremely low risk tolerance who value guarantees above all else
- Individuals without the ability or desire to manage investments
- People with family history of extraordinary longevity
- Those who’ve already maxed out other retirement vehicles and want additional tax-deferred growth
The Bottom Line: Control Your Financial Destiny
At the end of the day, what’s better than an annuity is maintaining control of your financial future. With a properly invested portfolio and sound withdrawal strategy, you can create your own “personal pension” without the downsides of annuities.
As one financial expert puts it: “We do not recommend annuities as part of your financial plan.”
I believe most people are better served by exploring these alternatives and working with a fee-only fiduciary advisor who can help them implement a retirement income strategy that:
- Provides reliable income
- Maintains access to capital
- Offers growth potential to combat inflation
- Leaves something for heirs
- Gives you control over your own money
After all, it’s YOUR money – shouldn’t you be the one to decide how it’s used throughout your retirement?
Have you considered alternatives to annuities? Which option seems most appealing to your situation? I’d love to hear your thoughts in the comments!
Disclaimer: This article is for informational purposes only and should not be considered financial advice. Please consult with a qualified financial advisor before making any investment decisions.
Security and low-risk nature
With both fixed annuities and CDs, there is a low risk that you will lose your principal. While both CDs and annuities offer safety of principal, CDs carry slightly more protection against principal loss due to their FDIC insurance.
CDs are insuredâup to $250,000 per depositor, per insured bankâby the FDIC, a government agency. This insurance means that if you deposit money into a CD and the bank fails, the FDIC guarantees you will not lose your principal, up to those limits.
Annuities, on the other hand, are not FDIC insured. Instead, theyâre backed by the insurance company that issued your annuity3. Because of the long-term nature of annuities, itâs a good idea to look for insurance companies that have the highest financial strength ratings.
What is an annuity vs. a CD?
An annuity is a contract between you and an insurance company that is designed to provide reliable income in retirement. Different types of annuities work slightly differently, making some better suited to people in different stages of retirement planning.
There are two main categories of annuities:
- Income annuities: Through an insurance company, you purchase (often with a lump sum) an income annuity, which will pay you income for a stated period or for the rest of your life. This income can start immediately or at a date set in the future. These are commonly referred to as immediate income annuities and deferred income annuities, respectively.
- Accumulation annuities: An accumulation annuity is a financial product that you purchase with the intent to grow your money. The money can grow at a fixed rate (fixed accumulation annuity), at a variable rate based on performance of the underlying subaccount allocation (variable annuity) or based on changes to an index (index annuity). The future balance can be used to create income, but it is not required to do so.
A certificate of deposit is essentially a type of savings account offered by banks in which you pledge to leave your money deposited for a certain period of time, usually in exchange for a higher interest rate than you would receive if you left your money in a regular savings account. CDs are insured by the FDIC making them a low-risk way of growing savings or generating income.
What Is An Annuity And How Does It Work?
FAQ
Are annuities safe?
While annuities are one of the safest options for retirement income, they aren’t your only choice. Consider options like 401 (k)s, IRAs, stocks, variable life insurance, and retirement income funds. The right choice depends on your financial situation and goals. Annuities may not suit every financial plan.
Are annuities a good investment?
If annuities aren’t a good fit, you can create retirement income with CDs, bonds, income funds, dividend stocks, or a mix of these. They may not offer high returns, but they provide steady income. Each choice has pros and cons, so review them carefully before deciding.
What are alternatives to an annuity?
In addition to bonds and CDs, retirement income funds and dividend-paying stocks are worth evaluating as alternatives to an annuity. How soon are you retiring? What is your goal for purchasing an annuity? What information are you looking for? How much have you saved for retirement? Are you a financial advisor or insurance agent?
Do you recommend annuities as part of your financial plan?
We don’t recommend annuities as part of your financial plan. What is an immediate fixed annuity? An immediate fixed annuity is not an investment. It is an insurance product. It is purchasing up-front the right to collect a fixed amount of income from the insurance company (in this case $1,300 per month) for the rest of your life.
Are REITs a good alternative to annuities?
For retirees seeking income, REITs can be a flexible alternative to annuities. They provide regular payouts and potential for capital appreciation, although they carry market risk like other publicly traded investments. Choosing REITs with a consistent dividend history can help create a more stable retirement income plan.
Should you invest in an annuity or a REIT?
Choosing REITs with a consistent dividend history can help create a more stable retirement income plan. If annuities aren’t a good fit, you can create retirement income with CDs, bonds, income funds, dividend stocks, or a mix of these. They may not offer high returns, but they provide steady income.
What is a better choice than an annuity?
Unlike annuities, which bundle income guarantees with insurance features (and fees), bonds allow retirees to maintain ownership of their principal and have more flexibility in managing maturities and reinvestment.May 15, 2025
How much will a $100,000 annuity pay monthly?
Is there an alternative to an annuity?
Drawdown is much more flexible than an annuity. You can change how much and when you take money out of it, and how any money you don’t take out is invested.Jun 15, 2025
Do millionaires use annuities?
While many annuity owners are solidly middle class, high-net worth people buy annuities, too. Mostly, they do so for the same reasons anyone else would: Guaranteed income for life, protection from market volatility and peace of mind in retirement.
