Money Matters

Want to Do Better Than Bonds? Consider Fixed Indexed Annuities and Fixed-rate Annuities

Bond yields are low. How can investors get a better return without taking on more risk?

Both plain fixed-rate annuities and more complex fixed indexed annuities (FIAs) can beat bonds.

A new study* from famed economist Roger Ibbotson says that investors should consider FIAs as a low-risk bond alternative likely to produce better returns. Ibbotson’s groundbreaking research includes extensive simulations. He and his team found that uncapped FIAs would have outperformed bonds on an annualized basis over 90 years, from 1927 to 2016.

Furthermore, the big capital gains in bonds over the last 10 years are highly unlikely to recur over the next 10 years, Ibbotson wrote. If rates rise, bond investors will instead incur capital losses.

FIA returns are linked to the performance of stock indexes such as the S&P 500 but are guaranteed not to lose money. They thus provide some of the upside of the stock market with none of the downside.

As a result, uncapped FIAs offer a more tailored risk profile than bonds, capturing a portion of the growth offered by large-cap stocks, while lowering overall market risk, the study found.

The study is an important advance that validates FIAs as asset class thoughtful investors should consider. They are complex, however, with a wide range of designs, so it’s wise to have an unbiased advisor walk you through your choices.

FIAs are tax-deferred. Interest isn’t taxed until withdrawn.

Fixed-Rate Annuities Also Top Bonds

While FIAs may outperform plain fixed-rate annuities over the long term, the latter have many advantages over bonds too.

Some investors prefer fixed-rate annuities because they’re more predictable and easier to understand than the indexed variety. Like CDs, they offer a fixed rate of return for a set period of time, but unlike CDs, deferred annuities are always tax-deferred.

There’s no sales fee, so all of your money goes to work immediately.

Fixed annuities have more guarantees and less risk than bonds, especially bond funds. If rates go up and you sell a bond prior to maturity, it will be worth less than its original cost. With an individual bond, you can avoid this by holding it to maturity.

But investors in bond funds don’t have that option. If interest rates spike up after you buy a fund, the value will decline.

Owners of individual bonds, except Treasuries, also face default risk.

In contrast, a fixed annuity is guaranteed by the issuing insurance company. State regulators constantly monitor the financial strength of insurers. State guaranty associations provide an additional level of protection.

With fixed annuities, the insurance company bears the underlying investment risk, shielding annuity owners from both bond market volatility and default risk.

Fixed annuities also let you reinvest interest earnings without risk. Reinvested interest earns the same rate as the base annuity, so the yield is guaranteed.

Contract owners who need income can choose to receive taxable interest earnings monthly, quarterly or annually.

Consider Splitting Annuity Money Between Fixed-Rate and Fixed Indexed

While many people put all their money dedicated to annuities in either the fixed-rate or fixed indexed bucket, you don’t have to.

Savers should consider acquiring both types. Using both lets investors get predictable interest income from fixed-rate annuities while having the opportunity to earn higher yields over the long term with the indexed variety.

There are some caveats, however.

FIA yields vary from year to year. If the market index is down for the year, the yield will be zero for that year.

Fixed indexed annuities are suited for investors with a time horizon of seven or more years and who have other funds they can tap in the interim.

If you need to withdraw interest earnings annually, I’d recommend plain fixed-rate annuities. If not, consider a fixed indexed annuity.

*The Ibbotson and Zebra Capital Management whitepaper, “Fixed Indexed Annuities: Consider the Alternative,” can be obtained from

Annuity expert Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed and immediate-income annuities. launched the AnnuityAdvantage website in 1999 to help people looking for their best options in principal-protected annuities. More information is available from the Medford, Oregon, based company at or (800) 239-0356.

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