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Can annuities replace bonds?

By Jennie L. Phipps ·
Tuesday, December 24, 2013
Posted: 6 am ET

"Bond King" Bill Gross, co-founder and co-chief investment officer of bond investment firm Pimco, predicted earlier this month that the Federal Reserve may work to keep bond rates low for years.

If you are a retiree or near-retiree who has invested heavily in "safe" long-term Treasuries and other bonds, and if Gross is correct, this could be bad retirement news. Sellers of annuities have been out in force, offering their product as a better retirement planning approach than bonds. Should you be listening?

The appeal of annuities

One of the advocates of annuities with guaranteed lifetime withdrawal benefits -- an appealing approach -- is Ronald Gelok, a New Jersey attorney and president of his own investment advisory firm, Ronald Gelok & Associates. Gelok says a deferred annuity has "zero market risk." He continues: "You lock in a minimum payment for the remainder of your life. If you add a guaranteed income rider, there is the possibility of significant gains in the benefit if interest rates rise."

Bankrate laid out the case for and against annuities here. The bottom line is that, especially in today's low-return interest-rate environment, annuities, which promise a monthly allocation of principal and interest, aren't going to give you much of a return on your money unless you live a lot longer than the actuaries predict. But that could be a bet you want to make -- especially if you come from a family where people live well into their 90s and maybe even get to 100.

Annuity caveats

Still, even a believer like Gelok has some reservations. He advises potential annuity buyers to:

  • Look at lots of options. The annuity market is large and complex. As Gelok says, "Some are not so good and some are really good."
  • Don't be a do-it-yourselfer. You'll need a trusted adviser to lead you through this purchase; someone who is a fiduciary and who has a legal responsibility to put your interests first.
  • Don't lock up all your money in annuities. If you need your cash back, you may not be able to get it. And if you do, there could be a sizable penalty.

"Annuities aren't a panacea. They aren't perfect," Gelok says. "But they can be a good alternative as part of a larger investment strategy."

What do you think? Have you been curious about annuities?

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Joe Haley
December 27, 2013 at 11:19 am

Great article. I am in that phase now where I want to lessen my equity exposure. What is a ballpark percentage to allocate to annuities? 33%?

Dave Noggle
December 27, 2013 at 10:27 am

Annuities can be a good fit for those spendthrift investors. Some clients have a hard time in looking at the long term let alone saving for the long term, so annuities may provide some of the answers.
While having a portion of an investors income earmarked for annuities, it contributes another income stream for their retirement.

kevin rizzuti
December 26, 2013 at 2:01 pm

I need a small loan !