IRA or Annuity: Which Is Better For Generating Safe Retirement Income? – 5 Experts Weigh In
Deciding what is the best strategy to provide income for retirement can be a difficult endeavor. An IRA is a retirement account that enables one to compound long-term savings for retirement. Conversely, an annuity is an insurance product, which pays out a fixed stream of payments. In this article, 5 experts discuss which is better for generating safe retirement income, an IRA or an annuity.
It Largely Depends On Age
“The answer to this question is going to depend largely on age. For someone who is in their 30s or 40s, they are going to have to wait at least until they're 59.5 before they can access the money without receiving tax penalties. And over long periods of time the market yields higher rates of return than annuities if you're properly invested in what are considered sensible investments. When you're getting closer to retirement age, and the market has been up for some time, it's advisable to shift your retirement money into more conservative options such as annuities.
Deferred annuities offer a few different accumulation strategies, with fixed annuities and index annuities being the safest in case there is a crash in the market. If you still want to be in the market with some additional protections, a variable annuity might be the right choice for you. Once your annuity has reached the end of its contract period you can either leave it there, invest it in a different product, take the lump sum, or turn it into an income annuity that pays you for the rest of your life, or for a specific amount of time.”
All Vehicles Have To Follow The IRA Rules
“An IRA isn't an investment by itself and is a government term. You can have an IRA CD, mutual fund, annuity, managed account, individual stock account etc. Opening one in any of those vehicles can be done and they all have to follow the IRA rules. Can't touch until age 59.5, have to start taking out money at age 70.5 and so on.
I have over 31 years in the business and own my own financial planning firm and I also have a practice where I consult and testify as an expert witness on insurance and investment fraud. When discussing the pros and cons of an IRA, I will ask what is an IRA paying/what is its interest rate. It depends since almost all investment types can be an IRA.”
Richard P. Sabo, CFS, RFC, Owner/Financial Advisor, RPS Financial Solutions
Annuities Are An Important Part Of Virtually Everyone’s Retirement Strategy
“Annuities are an important part of virtually everyone’s retirement strategy, given that Social Security is a form of a lifetime annuity. While the implicit return to Social Security for most individuals is abysmal, it is an income stream that most understand and value as an important part of any retirement strategy. The Social Security Administration says that half of married couples and more than 70% of unmarried people get at least half of their retirement income from Social Security. Almost a quarter of married couples and more than 40% of unmarried senior citizens rely on Social Security for fully 90% of their income in retirement.
Despite Ken Fisher’s annoying protestations to the contrary, annuities are an important part of a comprehensive retirement plan. Annuities too often get a bad rap. They can provide guaranteed income and peace of mind to the retiree and the retiree’s family. Having an annuity cover your basic living expenses is a terrific cornerstone to a retirement income plan. In particular, a longevity annuity is a stream of payments that starts when an individual reaches a certain age, say 85. If you have a longevity annuity, you have a secure source of income late in your life at a reasonable cost.
Unfortunately, given the current low-interest-rate environment, buying annuity income has never been more expensive. A popular alternative strategy is to assemble a portfolio of high-quality dividend-paying stocks, essentially creating an equity portfolio that is annuity-like. If one decides to go down that path, one need look no further than stocks that have increased their dividends for many consecutive years to find good, safe candidates for dividend investing. Some refer to these as ruler stocks because if you laid down a ruler on a graph of dividends over time, the ruler would point to the northeast and most of the points would be very close to the ruler. Others refer to these stocks as “dividend kings.”
Investors should seek out companies with attractive dividend yields and companies that look to be well-positioned to continue those payouts in the future. Dividends have been responsible for about 44% of the S&P 500’s returns over the past 80 years.
The advantage to dividend-paying stocks over bonds is that over the long-run, dividends increase and the stock price of these firms increases. With bonds, the holder only receives the promised interest payment and principal back.. While stock prices may be more volatile than bond prices over the short-term, the long-term returns are much higher from a diversified portfolio of dividend-paying stocks.”
Social Security Is The Best Annuity Out There
“Usually the case for an annuity in an IRA is so you do not outlive your money. If you think an annuity may be the right choice for you, then you are concerned about living a long time. If you are concerned about living a long time, then you will want to maximize your Social Security amount. Social Security is the best annuity out there because it is guaranteed by the US government and it includes cost of living adjustments as inflation goes up. There would be very few reasons to purchase an annuity AND claim Social Security before 70, at least for the spouse with the higher benefit.”
Robert Lindstrom, CFP®, EA, Provision Financial Planning
Diversity Of IRAs, Safety Of Annuities
“No simple answer-Each retiree should have their own criteria as what their investments goals are in regards to income returns, investments appreciation, risk tolerance levels, income tax impact, and personal standard of living.
Diversity of IRAs-There is also the fact that IRAs offer more diversity in the type of investments, such as bonds and like interest-bearing vehicles, stocks, EFTs or a combination of all these. These type of investments offer a wide range of options from conservative, low risk but low guaranteed fixed-income returns to equity IRAs offering higher risk but potentially higher appreciation returns. IRAs also have severe early withdrawal tax and interest penalties which annuities do not.
Safety of Annuities – Annuities offer a safe, low-risk income and typically are for very long terms, such as 10 years or longer at locked-in interest/income returns. There is no potential of price appreciation like equity IRAs but they offer high safety of the principal invested.”
Chane Steiner, CEO, Crediful
Choosing the best options for a retirement strategy to provide safe retirement income can be daunting. Factor in what the financial experts in this article have touched upon, and consult a financial or wealth advisor before investing your money for retirement.