Annuity Vs. CD: The Difference Between Fixed Annuity and CDs

Shawn Plummer

CEO, The Annuity Expert

Regarding investing for retirement or long-term financial stability, two options often surface Annuities and Certificates of Deposit (CDs). As different financial products, they present a unique set of features that can either benefit or disadvantage investors depending on their financial goals and risk tolerance. Thus, choosing between “annuity vs. cd” requires a thorough understanding of what each option offers.

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Annuities Unveiled

Annuities are insurance products that promise periodic payments in return for upfront investment. They can provide an income stream during retirement, making them an attractive choice for individuals who fear outliving their savings.

Example: Consider a 65-year-old retiree, Mr. Smith, who purchases an immediate lifetime annuity for $100,000. The annuity promises a yearly income of $5,000 for as long as he lives, providing a secure income stream in his retirement years.

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Pros and Cons of Annuities

Annuities can offer a steady income for life, a key benefit for those in retirement. They can also defer taxes on growth until withdrawal, making them appealing to high-earners. However, they often come with high fees, can be complex to understand, and lack liquidity. Moreover, the return on investment can be relatively low compared to more aggressive investment strategies.

Annuities Vs. Cd

CDs Deciphered

On the other hand, CDs are time-bound savings accounts offered by banks and credit unions. They pay a fixed interest rate over a specific term and return the original investment plus accrued interest upon maturity.

Example: Mr. Brown, a conservative investor, puts $10,000 into a 5-year CD with an annual interest rate of 2%. At the end of the term, he will have his initial investment plus $1,040 in interest.

Pros and Cons of CDs

CDs are low-risk investments, insured by the FDIC up to $250,000. They offer predictable returns and are easy to understand. Yet, the returns on CDs are typically lower than what you could earn through higher-risk investments. They also lack flexibility, with penalties for early withdrawal and minimal opportunities for further growth.

 Annuities Vs. Cds

Which Has Been Around Longer? Annuities Or CDs?

Annuities have existed since Roman times, originating over 2,000 years ago with “annua,” annual payments for life. Certificates of Deposit (CDs) have a much shorter history, introduced in the early 1960s in the U.S. as an alternative to savings accounts, making them roughly 60 years old as of 2023.

Annuities vs. CDs Benefits: A Head-to-Head Comparison

To aid your decision, use an “annuity vs. cd calculator” to compute potential earnings and compare outcomes. This tool can be valuable when considering “cd vs. annuity” or “cd vs. fixed annuity,” as it provides personalized results based on your specific inputs.

CD Annuities: An Interesting Middle Ground

CD annuities” or “certificates of annuity” are also known as multi-year guarantee annuities (MYGA) blend features of both CDs and annuities. They offer guaranteed returns like CDs but with tax advantages akin to annuities. It’s worth investigating if you’re torn between the two options.

Fixed Annuity Rates

Fixed annuity rates are determined by the insurance company that issues the annuity. These rates are primarily influenced by the current interest rate environment and the performance of the insurer’s investment portfolio.

Factors Impacting Fixed Annuity Rates

Several factors influence the rates you’ll get on a fixed annuity:

  • Term length: Generally, the longer the term, the higher the interest rate.
  • Current market interest rates: When market rates are high, fixed annuity rates also tend to be high.
  • Insurance company’s performance: The insurer’s financial strength and the performance of their investment portfolio can also impact the rates they can offer.
Cd Vs Annuity

CD Rates

CD rates, on the other hand, are usually set by banks and credit unions based on various economic factors, including the target federal funds rate set by the Federal Reserve.

Factors Impacting CD Rates

  • Federal Reserve’s policies: When the Federal Reserve raises its target rate, banks typically increase their CD rates to attract more deposits.
  • Bank’s need for deposits: If a bank needs to increase its liquidity, it might offer higher CD rates.
  • Term length: Like annuities, longer-term CDs typically offer higher interest rates.

Next Steps

In conclusion, both annuities and CDs serve specific financial needs. If you’re looking for higher potential payouts and aren’t concerned with accessibility, annuities may be the way to go. But CDs could be your best bet if stability, predictability, and low risk are more your style. Above all, consider seeking advice from a financial advisor to ensure you make the most informed decision.

Annuity Vs. Cd

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Frequently Asked Questions

Is an annuity better than a CD?

This is a difficult question to answer, depending on your specific financial goals and situation. However, annuities can generally provide greater potential returns than CDs, but they also come with more risk. If you are looking for a safe investment with guaranteed returns, a CD or a fixed annuity will be good.

Why are annuities better than CDs?

When it comes to saving for retirement, there are various options to choose from. Two of the most popular choices are annuities and CDs. So, which is the better option? Annuities have a few advantages that make them more attractive than CDs. First, annuities offer tax-deferred growth. This means that you can grow your money without paying taxes on the gains until you withdraw the money at retirement.

On the other hand, CD rates are subject to taxation every year. In addition, annuities provide guaranteed income for life. This can be a valuable benefit for retirees looking for a way to insure against the risk of outliving their savings. On the other hand, CDs do not offer this type of guarantee. So, when it comes to choosing between annuities and CDs, annuities come out ahead regarding both potential return and security.

What annuity is like a CD?

A fixed annuity or multi-year guaranteed annuity (MYGA) is similar to a CD in that it offers a fixed rate of return and provides tax-deferred growth. However, unlike a CD, an MYGA does not have a set maturity date. This means that you can hold the annuity for as long as you want and continue to receive the guaranteed income payments for life. As a result, MYGAs can be a good option for retirees looking for a guaranteed income stream that they can’t outlive.

Can I lose money in a fixed annuity?

Fixed annuities are among the safest types of investments, but they are not without risk. The most common types of risk associated with fixed annuities are interest rate and credit risk. Interest rate risk is the risk that the interest rate on the annuity will decline after the guaranteed term, which would reduce the value of your investment. Credit risk is the risk that the insurance company will not be able to make the guaranteed payments. While both of these risks are real, they are relatively small compared to the risks associated with other types of investments, such as stocks.

Are there 5-year annuities?

Yes, there are 5-year annuities. A 5-year annuity is a fixed annuity that offers a guaranteed rate of return for five years. After the five-year term, the interest rate will reset based on current market conditions.

Do banks offer annuities?

Yes, some banks offer annuities. However, not all banks are licensed to sell annuities, so it’s essential to check with your bank to see if they offer this type of investment.

Can an annuity be rolled into a CD?

No, an annuity cannot be rolled into a CD. Annuities and CDs are two different types of investments, and they each have their unique features. For example, fixed annuities are tax-deferred retirement savings plans, while Certificates of Deposit are taxable savings plans. Therefore, rolling a fixed annuity into a traditional CD will cause a taxable event. However, a fixed annuity can be rolled into an IRA CD if the annuity is a qualified retirement plan.

Is there a limit on an annuity?

There is no limit on how much you can contribute to a non-qualified annuity; however, qualified annuities, such as IRAs and 401ks, have contribution limits set by the IRS.

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Shawn Plummer

CEO, The Annuity Expert

I’m a licensed financial professional focusing on annuities and insurance for more than a decade. My former role was training financial advisors, including for a Fortune Global 500 insurance company. I’ve been featured in Time Magazine, Yahoo! Finance, MSN, SmartAsset, Entrepreneur, Bloomberg, The Simple Dollar, U.S. News and World Report, and Women’s Health Magazine.

The Annuity Expert is an online insurance agency servicing consumers across the United States. My goal is to help you take the guesswork out of retirement planning or find the best insurance coverage at the cheapest rates for you. 

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