My elderly uncle is convinced that annuities are better than bonds because the annuity will not only pay more on a monthly basis than a similar bond investment, but also would keep paying over the remainder of his lifetime. While that’s true, it doesn’t tell the whole story. There’s a more accurate way of comparing the two.
Because there are so many annuity variants, not to mention bond types, we’ll compare a basic single-life single premium immediate annuity (SPIA) for a 65-year-old male to a 10-year U.S. Treasury bond to keep the comparison apples-to-apples as closely as possible. For those unfamiliar with these investment vehicles, the SPIA in this example returns a guaranteed monthly payment for the rest of your life primarily based on three factors: (1) the amount of principal you contribute upfront, (2) your age and (3) current interest rates. The Treasury bond pays a guaranteed amount of interest twice yearly, also based on current interest rates, but only for 10 years, at which time your original principal is returned.
