Guaranteed Retirement Income Beyond Annuities: Financial Boom or Bust?

The idea of dependable, ongoing lifetime payments in retirement is appealing to many people. For over two thousand years, annuities have been a time-tested source of guaranteed income across continents, cultures, and walks of life.

Even now, the need for guaranteed lifetime income is still strong in the face of ever-changing markets, meager interest rates, and other economic factors often beyond anyone’s control.

Of course, there are some ways to get guaranteed retirement income beyond annuities. You have a number of vehicles at your disposal:

• Bond ladders,
• CDs,
• Treasury securities,
• Defined-pension payouts,
• Reverse mortgages, and
• Other certain fixed-interest investments

The Guaranteed Income Question

The million-dollar question is whether these guaranteed instruments can offer you the same level of confidence as annuities can.

Yes, decisions on what to include inside your income strategy always depend on your personal situation. But annuities themselves can pay you a guaranteed income for life in ways that others can’t.

Risk Management on a Grand Scale

A big part of this is how the life insurance company manages its risks with annuity payouts.

Insurance companies are able to take on greater risk than most individual investors because of their ability to spread the risk of their investment portfolios across thousands of investors.

Each contract is credited with mortality credits that account for the contract owner’s projected longevity. These credits are automatically built into every guaranteed payout that the insurance companies make. They greatly reduce the chances that the insurer could become insolvent.

Under state law, insurance companies also must have a dollar in cash or cash-equivalent reserves for every outstanding dollar of fixed or fixed indexed annuity premium.

This rule even applies to variable annuities if the contract owner opts for one of the living benefit or guaranteed income riders. Many insurance companies have more than a dollar in reserve in order to uphold their contractual promises to their annuity contract holders.

Other Alternatives for Retirement Income

Other vehicles for retirement income can come from bond ladders, CD ladders, defined-benefit pension plans, and reverse mortgages. As you explore these options, keep in mind the differences between how insurance companies manage risk on multiple fronts – and how those stack up against these income options.

Here is a quick overview of each of these different income choices.

Bond Ladders

This is a fairly common strategy used by financial advisors to provide investors with a steady stream of income.

How they work is fairly straightforward. Someone buys a series of bonds with staggered maturities and then reinvests each bond as it matures.

This is a particularly effective strategy when interest rates rise. Each bond will then be reinvested at a higher rate of interest, and the price of the bond won’t drop because the bond will be redeemed for its stated value at maturity.

CD Ladders

These ladders closely resemble bond ladders, except that CDs are used instead of Treasury Securities, corporate, or municipal bonds. In many cases, CDs issued by national banks or credit unions are used because of their higher interest rates.

Defined-Benefit Pension Plans

Pension plans pay guaranteed income just like an annuity. However, the employer is the financial backer of the plan.

As with annuities, recipients have the option to choose a straight life payout, joint life payout, or joint and survivor payout. Nevertheless, pension plans have become a rare breed in today’s marketplace. Most employers have chosen to use defined-contribution plans (like 401(k) plans) instead due to their lower cost.

Reverse Mortgages

A reverse mortgage pays a monthly stream of income to the homeowner, which is deducted from the home’s equity. The home doesn’t need to be completely paid off in order to do this. Retirement savers should do their homework thoroughly and read the fine print before taking one of these out.

What Do Economists Say About Annuities?

While you have many options for guaranteed income, annuities have recognized by top economists and finance minds for the certainty of lifetime income that they can generate.

The late Dr. David Babbel was a heavyweight in the finance world. He was one of the world’s leading experts on inflation, the creator of complex derivatives at Goldman Sachs, and a professor emeritus at The Wharton School of Business at the University of Pennsylvania.

In one research paper, Dr. Babbel noted how he had reviewed the research of 70 other economists on retirement. His conclusion about annuities? “Lifetime income annuities should definitely play a substantial role in the retirement arrangements of most people.”

Dr. Moshe Milevsky, whom many refer to as the godfather of modern retirement planning, observes on the almost-universal agreement of economists on annuities for lifetime income.

“There is almost a consensus in the ‘ivory tower’ that annuities make sense for the consumer,” he explains in a discussion on income annuities for retirement. “There have been 2,000 articles about annuities written by card-carrying professors since the 1960s, and 99.9% of them are pro-annuity.”

Finding the Right Guaranteed Income Solution

Annuities do have their drawbacks, but they are the only ‘personal pension plan’ in the marketplace today. No other financial vehicle can guarantee a stream of income for life as annuities can.

Bonds and CDs are at the whim of interest rate conditions. Annuities are as well, but not to the same degree. It’s possible to receive payments for life from a reverse mortgage, but you have to have sufficient equity in your home for that to happen.

And what about pensions? You have to work for a company that has a defined-benefit pension plan in order to be eligible for one.

But anyone can own an annuity. Consult your financial advisor for more information on different options for guaranteed income that can fit your needs, goals, and personal situation.

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