Avoid These 3 Retirement Income Risks

Bonds, bond funds, immediate and variable annuities may not be the best vehicles for generating retirement income. Instead, consider this alternative.

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If you’re preparing to retire, you may be spooked by today’s investing environment. That’s pretty understandable when you think about what’s happened in the stock and bond markets over the past 20 years: the 9/11 attacks, the financial crisis of 2007 to 2009 and the COVID-19 panic of March and April 2020. Despite the ups and downs, for example, the S&P 500, an index of the largest and most successful companies in America, has returned 7.51% on an annualized basis between Jan. 1, 2000, and Dec. 31, 2021. (1)

These returns put many who have saved consistently while working in a good position for retirement. However, saving for retirement and spending during retirement are two very different endeavors. That’s because when you save for retirement over many years, you have the time to outlast market volatility and bear markets. You don’t have the same ability during retirement, as you depend on your savings to generate income to pay your bills.

In other words, your retirement savings needs to replace your paycheck by providing a stream of income that can pay your bills. Options for such a substitute paycheck are numerous.

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That being said, retirement doesn’t come with a “do over” button. That’s why it’s so important to avoid three major retirement income risks.

Risk #1: Investing in bonds or bond funds in a rising rate environment

While U.S. Treasury bonds, bills and notes and highly rated corporate bonds were reliable sources of income in the past, that isn’t the case today. In fact, it hasn’t been the case for many years. Table 1 shows how much interest rates – and the income that these bonds generate – have fallen during the past few decades.

Table 1

Swipe to scroll horizontally
Header Cell - Column 0 10 Year US Treasury Bond YieldYearly Interest on $100,000 Investment
January 19907.94%$7,940
January 20006.58%$6,580
January 20103.85%$3,850
January 20152.12%$2,120
January 20211.88%$1,880
September 20211.31%$1,310

Source: U.S. Treasury Department (2)

Table 1 reveals how low the income that you could gain from investing in a 10-Year U.S. Treasury Bond has fallen. If you invested $100,000 in the 10-year U.S. Treasury bond in 1990, you would receive $7,940 in income per year. However, that same investment of $100,000 today would yield $1,310 in income, more than six times less.

Much lower interest rates translate into much less income from bond investing. Not only that, but if interest rates rise, the value of existing bonds declines. That means that any bonds you buy today to provide income in retirement will be worth less in the future. Rates have already begun rising, with the Fed boosting them 0.25% in March – its first increase since December 2018. And up to six more rate increases could be coming this year.

The danger of rising rates is especially relevant for bond fund investors. That’s because bond fund managers frequently buy and sell bonds in and out of their portfolios. When lower-yielding bonds are sold, they are usually sold at a loss. Those losses will be reflected in a lower bond fund net asset value, which means that your bond fund holdings will be worth less over time.

Some investors looking at this picture might conclude that they stand to gain more by investing in riskier bonds, also known as “junk bonds.” It’s problematic to chase higher yields there, however. The name “junk bond” already gives you a clue — these are companies whose financial situation is shaky in the first place, and they may miss interest payments or even default without warning. This makes investing in high-risk/non-investment-quality bonds riskier even than putting your money into comparable stocks. (3)

Bottom line: Retirement investors of today must confront the likelihood of lower returns than are ideal for retirement income as well as potential underperformance that bonds and bond funds may provide in the future. (4)

Risk #2: Purchasing an Immediate Annuity

If you are close to or already in retirement, you may be attracted to an immediate annuity. When you buy an immediate annuity, you hand over a lump sum of money to an insurance company, and in return receive a guaranteed payout, sometimes for your whole life. This arrangement seems like it could create an attractive income stream.

However, immediate annuities definitely have some drawbacks. Like U.S. Treasury bonds, rates are pretty low, meaning that you won’t get much bang for your buck. When you buy an annuity, you tie up your money for the rest of your life. That means you won’t be able to access it in the event of an emergency.

Another concern is that many immediate annuities lack inflation protection. That means that over time, due to rising pricing, the income you receive from an immediate annuity wouldn’t go as far. That is significant during retirement, which may last 25 or 30 years or longer. (5)

Risk #3: Buying a Variable Annuity

Variable annuities are a type of annuity that provides returns dependent upon the underlying investments. These underlying investments are usually mutual funds tied to different stock market indexes. Variable annuities are generally used to generate income during retirement.

However, variable annuities tend to be complex, expensive products. Fees can include mortality and expense fees, mutual fund account management, contract maintenance fees, transactions and other costs that can range as high as 4% a year. (6) Variable annuities also charge back-end surrender fees that go into effect if you cash out of your annuity before 10 years – or longer, in certain cases – after you purchase it.

When you buy a variable annuity, there’s the option to purchase various riders or optional add-ons.

These riders may include:

  • Living benefit: Guarantees a certain amount of benefits during your life.
  • Death benefit: Guarantees a specific death benefit to your heirs.
  • Guaranteed minimum accumulation benefit rider: Kicks in if the actual value of your annuity falls below a pre-determined number.
  • Guaranteed minimum withdrawal benefit rider: Offers you the ability to withdraw a certain percentage of the annuity every year until the original premiums you paid are exhausted.
  • Guaranteed lifetime withdrawal benefit rider: Provides the ability to obtain income for life without having to convert to an immediate annuity.
  • Disability: Provides a payout if you are disabled.
  • Terminal illness: Provides a payout of a certain amount of the annuity if you are diagnosed with a terminal illness.
  • Unemployment: Provides a payout if you are unemployed for a period of time.

These riders can seem very attractive. However, they can come at a steep cost. That’s because you will have to spend more to get the same amount of income or accept reduced income in exchange for the benefits you want. (7)

There’s no way to know when you purchase an annuity if you will actually use the riders that you buy. That means you may spend money or pay additional fees for features that you ultimately don’t use. Rider fees typically are not refundable.

What to Consider Instead? How about a Fixed Index Annuity?

A plain vanilla fixed-index annuity offers a stream of income in retirement without the expensive bells and whistles of a fixed index annuity with riders or a variable annuity. This type of annuity offers upside potential in the form of participation in the gains of a market index that is usually capped. The principal is protected by the issuing insurance company as long as you hold the annuity until maturity.

The best fixed index annuities offer the option to withdraw up to 10% of the contract’s value at any point to meet emergency expenses. This feature is highly beneficial – and available without additional costs – and offers flexibility to retirees. To entice buyers, insurance companies that provide fixed index annuities may guarantee a minimum income rate and offer enhanced or boosted rates for the first year of the contract or beyond.

Like all retirement income products, there are some downsides to fixed index annuities. Liquidity can be limited if you want to avoid fees. Contract language can also be complex and opaque. Before purchasing a fixed index annuity, it is a good idea to consult with an independent financial adviser well versed in these products to ensure that first of all, the product is right for you and second of all, that you get the best deal available in the marketplace.

Amy Buttell contributed to this article.

1 “Compound Annual Growth Rate (Annualized Returns),” MoneyChimp.com, www.moneychimp.com/features/market_cagr.htm

2 “Daily Treasury Yield Curve Rates,” U.S. Treasury Department, www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=1990

3 “Are High-Yield Bonds Safe?” Investopedia: www.investopedia.com/articles/bonds/05/junkbondrisk.asp

4 “Retirements and Bonds No Longer Mix. Here’s an Alternative,” Forbes: www.forbes.com/sites/robisbitts2/2020/09/30/retirement-income-and-bonds-no-longer-mix--heres-an-alternative/?sh=4d239c593bdb

5 “Single Premium Immediate Annuities,” annuity.org: www.annuity.org/annuities/immediate

6 “Is a Variable Annuity a Good Idea?” SmartAsset.com: https://smartasset.com/retirement/is-a-variable-annuity-a-good-idea

7 “The Benefits and Drawbacks of Annuity Riders,” www.annuityfyi.com/blog/2015/06/benefits-drawbacks-annuity-riders

Securities and Advisory Services offered through Client One Securities LLC, Member FINRA/SIPC and an Investment Advisor. Bellue & Associates Inc. and Client One Securities are not affiliated.

Licensed insurance professional. We are an independent financial services firm helping individuals create retirement strategies using a variety of investment and insurance products to custom suit their needs and objectives. Investing involves risk, including the loss of principal. No investment strategy can guarantee a profit or protect against loss in a period of declining values. Any references to protection or lifetime income refer to fixed insurance products, never securities or investment products. Insurance and annuity products are backed by the financial strength and claims-paying ability of the issuing insurance company.

The information is not intended to be investment, legal or tax advice. The agent can provide information, but not advice related to Social Security benefits. The agent may be able to identify potential retirement income gaps and may introduce insurance products, such as an annuity, as a potential solution. For more information, contact the Social Security Administration office, or visit www.ssa.gov.


This article was provided by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Brady Bellue
President, Bellue & Associates Financial Management

Brady Bellue has been in financial services since 1997. He attributes his success to lots of research, being proactive, continually learning and always being available to his clients. Brady received his early experience in Chicago and New York before moving back to Wisconsin, where he has run his own business, Bellue & Associates Financial Management, since 2000. He prides himself on staying on the forefront of financial trends and innovations.