Last Updated: July 2020
Thinking about potentially outliving our retirement funds and running out of money during the years that are meant for travel, enjoyment of life, and spending time with the grandkids can be frightening.
Sadly, it is becoming more challenging to retire safely, and inflation continues to make things more challenging.
If you believe you already have enough money set aside to live well into your 80’s or even 90’s, likely, you have already put together a robust financial plan and know how you are going to reach your goals.
Unfortunately, most individuals do not fall into this category and need some additional guidance to get started.
Annuities and CD’s are two standard options individuals have the option of investing in to help safeguard retirement funds while earning some interest.
However, both investments are different in several ways, and it is essential to understand the benefits and drawbacks of each.
In this article, we will cover:
- Annuities Overview
- CD’s Overview
- Annuities Vs. CD’s
- Deciding Which Is Best for You
- Beginning the Process
For the sake of comparing annuities vs. a cd, we will stick with discussing fixed annuities.
Fixed annuities are the most common form of annuities that have several characteristics that are similar to a CD (more on this later)
Fixed annuities are essentially a contract between you and the insurance company you choose to work with.
The primary objective of an annuity is to save income towards retirement.
Annuities are also highly beneficial due to their ability to stream income, which can be critical for seniors needing to budget lump sums of cash to retire comfortably.
Annuities allow you to begin payments immediately or defer the earnings until a later specified date in time.
During this deferment period, taxes are also deferred.
Fixed annuities can offer a fixed interest rate that is locked in for a pre-determined length of time that most commonly will range from 3-10 years.
In most situations, the longer you choose to lock your money in an annuity, the better-fixed interest rates you can receive.
When structuring an annuity, you are also capable of structuring your payout phase.
This simply means you will be able to select the duration you need the money streaming.
Of course, this will vary based on the kind of annuity you purchase.
Some individuals will choose to receive payments for life at lower amounts, and some will have what is known as a “period certain,” which will stream the payments to you for a locked-in number of years such as 10, 15, or 20 years.
When considering if an annuity is the right investment for you, it is also essential to consider the other options.
Here is a more in-depth look at the CD as an investment option.
CD’s are like annuities but still have some significant differences.
Instead of being offered by the insurance companies, CD’s are provided by banks and FDIC insured.
CD’s are not meant to be a long term play and are designed to earn some interest for the short term, although it is possible to purchase a CD that can have a fixed interest locked in for up to 10 years.
In most situations, an annuity is going to be capable of providing a higher interest rate on your investment if you are in between a locked-in period of 3-10 years.
CD’s can be a nice, low rate of return but a safe investment that is meant to be collected and reinvested in shorter intervals than annuities.
Now, let’s stack up the annuity vs. the CD to give you a clearer picture of the differences.
Annuities Vs. CD’s
Annuities allow for you to collect your payments in intervals such as monthly, quarterly, annually, or semi-annually with interest and principal.
CD’s only allow for payouts at the end of maturity date with both interest and principal at the same time.
With annuities, you are going to defer your taxes until you begin taking your stream of income.
At this time, portions of your principal and interest earned are going to be taxed as regular income taxes.
With CD’s, the principal is never going to be taxed, and your interest income will be taxed as regular income.
Annuities are not typically designed for individuals needing liquidity.
On the other hand, CD’s can be purchased in durations that make them much easier to convert to a lump sum of cash if necessary.
While the earning potential may be slightly lower with CD’s, the option to get your money is a nice relief in case an emergency arises.
Not to mention, do not forget that annuities have a surrender period in which could cost you 10% if you happen to need to cash out your annuity before the payout period is designed for beginning at age 59.
Deciding Which Is Best for You
When making your decision on if an annuity or a CD is best for you, the first consideration should be how liquid you need the funds to remain.
This should be a consideration that is discussed and analyzed before any investment.
Due to a CD only needing 6 months to mature in some cases, although you can choose longer, it makes them much more viable for individuals who do not like the idea of the money being locked away or facing surrender charges.
For long term investors where the money being invested is earmarked for nothing more than investing and retirement savings, an annuity is a perfectly viable investment to choose that can be safe and earn modest returns.
Annuities should also be your front runner if you are in need of your lump sum cash being distributed to you on a monthly basis in order to help cover ongoing expenses that often remain a part of life even deep into your retirement years.
Beginning the Process
When you begin searching for the correct investment for you, you should be working with a licensed professional who has access to offer you several different options such as annuities and CD’s in addition to someone who can allow you to shop interest rates with dozens of providers.
Annuity rates are always changing and depending on the length of time you can invest; you can likely find a higher interest rate than you believe possible by shopping your options.
Investing for retirement can be intimidating and cause anxiety for many.
It seems tough in today’s world to feel prepared or to have a fighting chance to keep up with the cost of inflation.
At the end of the day, talking with a licensed professional and evaluating all your options is the best approach you can take.
Ultimately, it is going to be the best way to ensure you are investing in the highest performing annuities or CD’s.
Best of luck in your search.