What Is Better Than an Annuity for Retirement – Calculator

There is no single financial product that is automatically better than an annuity for retirement.

It depends on what you are trying to accomplish.

If you want market growth, there are better choices than annuities.

If you want contractual lifetime income, annuities provide something other financial product categories do not.

The better question is not which product wins. It is how annuities and other retirement assets can work together.

Key Takeaways

• Annuities are contracts designed to transfer specific financial risks.
• Annuities can provide Principal Protection, Income for Life, Legacy, and Long-Term Care solutions.
• Annuities should not be purchased primarily for market growth.
• Lifetime income is one of the primary reasons to consider an annuity in retirement.
• MYGAs can provide principal protection and a guaranteed interest rate.
• Market investments and annuity guarantees can complement each other rather than compete.

What Makes Annuities Different?

Annuities are insurance contracts issued by life insurance companies.

They are not traditional investments.

Their purpose is to transfer specific risks from you to the insurance company.

That may include the risk of:

• losing principal
• outliving your money
• not having enough dependable retirement income
• certain legacy needs
• certain long-term care needs

That is a very different job from a stock, mutual fund, or ETF.

The PILL Framework

Annuities generally solve four contractual objectives:

• Principal Protection
• Income for Life
• Legacy
• Long-Term Care

That is the PILL framework.

Notice what is not included: market growth.

If growth is your primary objective, an annuity is not designed to solve that problem.

Are Investments Better Than Annuities?

For market growth, yes.

Stocks, mutual funds, ETFs, and other market-based investments are specifically designed to participate in market growth.

Annuities are not.

That does not make investments universally better.

It means they serve a different purpose.

The investment side of your portfolio can pursue growth while the annuity side provides contractual guarantees.

What Is Better for Lifetime Income?

When the goal is contractual lifetime income, annuities are designed specifically for that purpose.

There are four primary annuity strategies that can provide lifetime income:

• Single Premium Immediate Annuities
• Deferred Income Annuities
• QLACs
• Income Riders

These products can provide income that continues for as long as you live.

If structured jointly, the payments can continue for as long as either covered person is alive.

Social Security Is Already Lifetime Income

Most retirees already have one lifetime income source: Social Security.

Social Security provides income for as long as you live and includes inflation adjustments under the program's rules.

The question is whether Social Security and any pension income you have are enough to cover your desired retirement lifestyle.

If not, an annuity can potentially fill the remaining income gap.

What Is an Income Floor?

Your income floor is the dependable amount of money reaching your bank account every month.

It may include:

• Social Security
• pension income
• contractual annuity income
• other dependable income sources

The goal is to establish enough dependable income to cover the expenses you want guaranteed.

Once that floor is in place, the remaining assets can stay positioned for growth and other financial goals.

An Income Floor Can Help You Stay Invested

Market volatility is easier to handle when your monthly retirement expenses are not completely dependent on selling investments.

If your income floor is already established, you may be less likely to sell investments during a market decline simply because you need money to live.

That is one way annuities and investments can complement each other.

The guarantees provide stability while the market assets remain positioned for growth.

What If You Only Want Principal Protection?

If you have enough lifetime income but want to protect part of your principal while earning a guaranteed interest rate, a MYGA may be appropriate.

A Multi-Year Guarantee Annuity provides:

• principal protection
• a guaranteed interest rate
• a specified contract term

It is the annuity industry's closest comparison to a CD.

MYGAs vs. Fixed Index Annuities

If you want a guaranteed interest rate, a MYGA provides a straightforward contractual number.

A Fixed Index Annuity works differently.

Its potential interest is based on an external index and the contract's crediting method.

Future indexed returns are not guaranteed.

That is why a Fixed Index Annuity should not be purchased because someone projects attractive future returns.

Do Not Buy an Annuity for Market Growth

If an annuity is being presented primarily as a way to get stock market-like growth, be cautious.

You may hear phrases such as:

• market upside with no downside
• market participation with principal protection
• large upfront bonuses
• attractive back-tested returns

Those features do not turn an insurance contract into a direct market investment.

If you want market growth, pursue market growth through products designed for it.

Surrender Charges Matter

Many deferred annuities have surrender charge periods.

That is another reason annuities should not be confused with normal market investments.

If someone is presenting an annuity primarily as a market-growth product, ask whether the contract has surrender charges.

Liquidity restrictions are part of the trade-off you accept for certain insurance guarantees.

Fixed Index Annuities Have a Specific Role

Fixed Index Annuities are not inherently bad products.

The issue is how they are sometimes presented.

One practical use for an FIA is as the underlying contract for an Income Rider.

In that situation, the focus should be the contractual lifetime income guarantee rather than the hypothetical indexed accumulation.

What About Upfront Bonuses?

An upfront bonus should not determine which annuity you purchase.

The bonus is part of the economics of the contract.

A larger bonus does not automatically create a better retirement solution.

If lifetime income is the goal, compare lifetime income.

If principal protection is the goal, compare principal-protection guarantees.

Annuities Are Transfer-of-Risk Products

This is the easiest way to understand where annuities belong.

You are transferring a risk to the insurance company.

You may be transferring:

• longevity risk
• principal risk
• income risk
• certain legacy risks
• certain long-term care risks

The insurance company then provides the contractual guarantee defined in the policy.

Do You Need Both Annuities and Investments?

For many retirees, the answer may be yes.

The two can serve different jobs.

Market assets can pursue growth.

Annuities can provide contractual guarantees.

That allows you to avoid forcing one product to solve every financial objective.

You Do Not Have to Go All In

Retirement planning does not need to be 100% annuities or 100% market investments.

You can determine the amount of guaranteed income and principal protection you actually need.

Then keep the remaining assets available for:

• market growth
• liquidity
• emergencies
• discretionary spending
• legacy goals

The appropriate mix depends on your individual retirement plan.

Start With Two Questions

Before considering an annuity, ask:

What do you want the money to contractually do?

When do you want those contractual guarantees to start?

Those answers determine whether you even need an annuity and, if so, which type deserves consideration.

Where to Compare Annuity Guarantees

If you're ready to compare quotes, use our annuity calculators to evaluate current contractual guarantees from multiple insurance companies.

For lifetime income, compare the actual contractual payouts. For principal protection and guaranteed interest, compare current MYGA rates and terms.

The Bottom Line

What is better than an annuity for retirement?

For market growth, market investments are better suited to that job.

For contractual lifetime income, annuities provide a guarantee that other traditional financial product categories are not designed to provide.

The goal is not to choose one side.

Use investments for growth and annuities for the guarantees you actually need.

When those roles are clearly separated, the two can work together to create a stronger retirement plan.