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Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next. Bankrate follows a strict , so you can trust that we’re putting your interests first. All of our content is authored by and edited by , who ensure everything we publish is objective, accurate and trustworthy. Our banking reporters and editors focus on the points consumers care about most — the best banks, latest rates, different types of accounts, money-saving tips and more — so you can feel confident as you’re managing your money. Bankrate logo Editorial integrity
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You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. No one wants to run out of money in retirement. If you’re hoping to have enough savings to live off into your 70s, 80s and even 90s, you’ll need to plan ahead. You must also carefully consider where you’ll store the funds you’re setting aside to provide a sufficient income stream in retirement. Sometimes that can be more difficult than saving the money itself. One decision that can be tough for retirees is choosing between (CDs) and fixed annuities. Conservative investors may feel secure knowing that CDs are insured by the federal government, but there are tax incentives associated with the annuities that insurance companies offer. Fixed annuities vs CDs Rates
have stalled for months, and yields across the board have been falling more recently in anticipation of a decision to cut interest rates at the Federal Reserve meeting on July 31. As expected, 0.25 percent to a range of 2 to 2.25 percent. It was the central bank’s first rate cut since the financial crisis in 2008. Long-term CDs, in particular, have taken a hit. In just a few months, the average five-year CD rate fell from 1.48 percent APY to 1.29 percent APY, . Even though the Federal Reserve has held the fed funds rate steady for half the year, CD rates have fallen as Treasury yields have declined. The Fed’s decisions may have little to no impact on annuity rates, depending on the kind of annuity you’re interested in. Rates on fixed annuities, however, will likely drop. Historically, annuity rates have been higher than CD rates found at the bank, says Bryan Bibbo, an adviser at the JL Smith Group in Avon, Ohio. With a fixed five-year annuity, for example, it’s possible to end up with a rate of 4 percent. Today’s pay just over 3 percent APY. Fixed annuities vs CDs Security
CDs and fixed annuities are similar because in the end, you’re guaranteed to receive your principal investment plus a certain amount of interest. But they’re insured by different entities. Fixed annuities are insured by insurance companies, which aren’t always financially secure or creditworthy. If an insurer goes bankrupt, another will likely step in. Annuity holders will get some sort of minimum guaranteed payout, but their interest rate will be reduced, according to Bibbo. Bibbo recommends reviewing insurers using data from two or three credit agencies and finding out how financially sound a particular company is before funding an annuity. Craig Kirsner, a retirement planner and an investment adviser representative at Stuart Estate Planning Wealth Advisors, says that few insurance companies ever fail. But his clients have peace of mind knowing they’re getting an annuity from an A-rated insurer. Some banking institutions are healthier than others from a financial standpoint, so comparing how safe and sound banks and credit unions are could be a good idea. Unlike annuities, however, CDs, are generally insured up to $250,000 through the Federal Deposit Insurance Corp. or the National Credit Union Share Insurance Fund. With fixed-indexed annuities, your principal investment is protected and there’s an opportunity to potentially earn more interest than you would through a standard fixed annuity. But because returns depend on the performance of market indexes like the S&P 500, you could end up earning no interest at all in a single year. Fixed annuities vs CDs Taxation
The guaranteed rate of return is nice for savers with CDs, but they pay the price when tax time rolls around. If you have a CD, expect to pay taxes on any interest you earn every year, even if you don’t have access to that money. With annuities, however, your money grows on a tax-deferred basis and you won’t owe any taxes until you’re ready to make a withdrawal. “If you’re in a higher tax bracket and don’t need the money for some time, you’ll enjoy the power of tax-deferred compounding inside an annuity,” says Kelly Crane, chief investment officer of Napa Valley Wealth Management. Fixed annuities vs CDs Penalties
CDs come in different flavors and some, like , don’t hit you with a penalty for withdrawing your money before the term ends. But with traditional CDs, there is an early withdrawal penalty that varies depending on the length of the term and the bank or credit union managing the account. With most annuities, you can withdraw a portion of the fund (usually up to 10 percent) per year without incurring a penalty. But for fixed annuities, fees in the form of surrender charges often come into play, and you’ll be charged for pulling out funds within a certain time frame after investing in an annuity. You could easily end up with a penalty just by not understanding the terms of your contract, Bibbo says. Making the decision
Retirees have a lot to consider before deciding how to invest their money. Annuities offer many benefits, particularly as CD rates decline, but individuals must consider their time horizon, financial plan and whether going with an annuity makes sense. Doing plenty of and is key. Learn more
SHARE: Amanda Dixon Lance Davis is the Vice President of Content for Bankrate. Lance leads a team responsible for creating educational content that guides people through the pivotal steps in their financial journey. Related Articles