Certificate of Deposit (CD) vs. Fixed Annuity


For decades, bank Certificates of Deposit (CDs) have been attracting investors who want to save for their retirement, luring them with the security of FDIC insurance and the promise of locked-in rates of return.

CDs have gotten a lot of attention, but there are products out there now that may offer better returns than CDs, have the potential for even greater returns and contain similar safety features just like CDs… Fixed annuities such as fixed rate annuities and fixed indexed annuities.

Recently, the Federal Reserve has cut interest rates to their lowest levels in over 40 years. Fixed annuities are pulling far ahead of CDs in helping people meet their retirement savings goals. 

While CDs are FDIC-insured and convenient, they do have some real limitations, and those shortcomings become more apparent when they’re compared with fixed annuity products. Here are some key points every prospective CD buyer should consider:
 

Inflation         Yields on CDs have been lower than the rate of inflation in one out of every five years. After subtracting taxes and the rate of inflation, the return on any given CD has been negative about 50% of the time.

Annuity products – whether fixed rate or fixed indexed consistently trump the inflation rate and provide highly-competitive rates of return.


Taxes             The interest earned from a CD is subject to federal and state income taxes each and every year, whether you use the income or let it accumulate.  Therefore, you will receive a 1099 ever year.

Fixed annuities, on the other hand, grow tax-deferred. That means no 1099s, so the money you would have paid in taxes during the accumulation phase of a CD, keeps working for you in an annuity. And this can drastically reduce the time needed to reach your retirement goals because of “triple compounding”.

What is “triple compounding”?

Through a tax-deferred annuity, you are paid:


Lifetime Income      CDs offer no guarantee of income for life. 

Only an annuity can offer that.  People often believe that while annuities do offer a guarantee income for life, when the person dies, there’s no more income or money to the heirs. That’s not entirely true. Annuities, like most financial tools, can be fashioned to meet one’s goals and needs.


Liquidity        Banks are not required to give you access to your CD principal during the term of the CD and may even prevent you from making early withdrawals.  Any early withdrawals will incur interest penalties.

Annuity accounts are liquid when compared to bank CDs.

It’s your money—shouldn’t you have
access to it when you want it?

 

Risk      Although CDs are FDIC-insured, dollar for dollar, including principal and any accrued interest, up to the insured limit, in the event of a bank failure, you may still encounter delays with the FDIC returning your CD principal.  CDs are only as safe as the bank that holds them.

While annuities are primarily backed by the strength of the insurance companies that underwrite them, they do have certain backings that make them favorable tools for many retired Americans.  The guarantee of annuity principal is grounded in the legal reserve system, which was developed to protect contract owners through prudent asset management and accounting practices.

Additionally, every state has a Guaranty Association that insures the annuity up to a certain set limit. (Click here for your state’s Guaranty Associations).  Annuities are underwritten, in many cases, by some of the largest insurance companies in the world. Ratings and financial holdings of these companies are public information. 


Asset Protection     CDs may be garnished or seized if you get sued. 

Annuities on the other hand, can be great asset protection tools. Many states protect annuity contracts and payments from creditors. Even in states that allow creditors to garnish the annuity payments, the creditor must do so on a monthly basis and does not, therefore, get a lump sum.


Estate Planning      CDs may be subject to costly, public and time-consuming probate. 

Annuities contain beneficiary provisions that allow your heirs to inherit your annuity outright and privately, therefore bypassing the public probate process. And that provision also protects your heirs from any incontestability in the future.
 

What is probate? After a person dies, ownership of his or her property, assets and personal effects must be legally transferred to the heir. Probate is the legal name given to this process.

The probate process may be time-consuming, public and, in some cases, expensive.  One way to avoid this whole process is to utilize an annuity and designating your heirs as the beneficiaries.


Returns     In 2002, real returns on CDs, after taxes and inflation, fell into negative numbers according to the Federal Reserve Board.  Unfortunately, a reliance on CDs to fund your retirement plan could result in a 40% shortfall at retirement age and may require you to work after age 65. 

Annuities may offer a potential for higher returns than CDs.  Fixed indexed annuities, for example, have their returns linked to an index such as the Dow Jones, S&P 500 or NASDAQ and participate in the growth of those markets without putting your principal at risk from potential downturns in the market.


Annuities Have Tax-Deferred Account Status

No taxes are due on an annuity’s earnings until withdrawn, while interest on a CD is taxed each and every year whether you touch it or not. Some people have to make quarterly estimated tax payments because of interest they earn on their CD’s.

 How much better is an annuity than a CD?
(The following illustration assumes you are in the 33% tax bracket)

If your Annuity earns 6%—a CD would need to earn 8.96%
If your Annuity earns 7%—a CD would need to earn 10.45%
If your Annuity earns 8%—a CD would need to earn 11.94%  

 

Choices        While CDs may provide the convenience of a local bank and the safety of FDIC-insured, annuities may provide you with a lot more choices such as:

Clearly, not many investments provide all of these important features, except a fixed annuity.


Who Uses Annuities?     

Schools, hospitals and churches don’t have Social Security, so they use annuities to fund their retirements.

State Lotto Funds and high salaried athletes use annuities to fund their payouts.

 

“Millions of seniors are pouring record sums into annuityaccounts.”

—The Wall Street Journal

To learn how a Fixed Annuity may benefit you or to receive a CD/Fixed Annuity Comparison, click here and an Advisor will contact you promptly.

 

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