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Retirement planning 101: Seven questions you need to answer

5. Do you try bond alternatives?

Jason E. Miczek/Reuters
A man uses a Bank of America ATM in Charlotte, N.C., Wednesday. Cash stowed in a bank account has the virtue of being stable and government insured (up to a point), but it offers relatively low returns that don't always keep up with inflation.

  • By Mark Trumbull Staff writer

One alternative to bonds is the certificate of deposit, which pays interest on money you park for a period of your choosing, such as one or two years.
 
Here are two other important alternatives that share a fixed-income element, but are quite different from bonds: cash and annuities.
 
Cash held in a money-market fund or savings account has the virtue of price stability, at least in a manner of speaking. A dollar that you put in typically won't fluctuate in its face value – except for those very rare cases in which a money-market fund "breaks the buck" when its holdings lose value. (FDIC-insured accounts offer the greatest safety, guaranteeing your money even in cases of bank failure.)
 
But cash has the disadvantage of earning very low (sometimes barely visible) interest income.
 
That means even money market funds are risky. In the past few years, those low rates of interest have meant you earn a negative real return on your money – it's not even holding its value against inflation.
 
Note that some online banks offer much better interest rates than the typical large commercial bank.
 
As for annuities, these insurance products can offer an efficient way to lock in a fixed income in retirement. You commit to put money in up front, and the insurer agrees to pay a fixed amount each month during your retirement. One example is a New York Life product, the "Guaranteed Future Income Annuity," that workers can contribute to.

With some annuities, you can pay extra for inflation protection or survivor benefits.
 
Note: What you're reading about here is a  “fixed annuity," as opposed to the “variable" kind of annuities that are more akin to stock mutual funds (more potential upside gain, and more risk)
 
Some savers may choose to build a base level of retirement income through Social Security, fixed annuities, or other fixed-income holdings, and then turn to riskier stock investments to build their nest eggs up from there.
 
One important risk for annuities: Their guarantee is only as good as the insurance company that makes the promise. If an insurer fails, many states have reserve funds that will provide a partial payout to policyholders. So check into ratings and the reputation of the insurance company before you buy.

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Mark Sappenfield
Editor

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