Brian Gruss Licensed Insurance Planner

CDs vs. Annuities: Where Should You Invest Your Money?

If you’re quickly approaching retirement, you’re probably asking yourself an all-too-common question: should I invest in a bank CD or an annuity? You’re not alone. Consumers across the nation are struggling with the same dilemma. The first step in making this important decision is to understand the differences between these two products.

Annuities and CDs (short for bank certificates of deposit) might appear to be very similar at first glance. Both are secure, low risk investments that are designed to help you accumulate wealth. However, these two types of investments are actually very different products.

First of all, CDs are generally issued by banks while annuities are offered by insurance companies. Secondly, a CD is typically a better investment for short-term goals, such as a down payment on a new home or car, while an annuity is a better choice for longer term goals, like generating a lifetime stream of retirement income.

Here are a few things to keep in mind as you weigh the differences between CDs and annuities:

CD interest rates are uncertain

Interest rates have plummeted in recent months. While that’s a great thing for homebuyers, it translates into lower returns on bank savings. Right now, one-year CDs often pay 1.5 percent or less—a huge drop from a couple of years ago when CDs paid more than 3 percent.

The future is uncertain for CD interest rates. Your rate on a CD may be higher or lower a year from now—it’s too hard to predict. So, if you’re looking to maintain a certain retirement income level, a CD may not be the best bet.

Guaranteed rates with fixed annuities

Fixed annuities offer a guaranteed minimum. This ensures that your investment will not drop below the minimum performance. When interest rates drop, so do returns on CDs. But fixed annuity returns never fall below a certain point. Therefore, if you hold a fixed annuity until maturity, you are guaranteed to earn a minimum stated rate of interest regardless of what happens to interest rates or stock market indexes. Because fixed annuities are lower risk, conservative investments, they are often ideal for retirees or soon-to-be retires.

Fixed annuities offer incredible tax advantages

With CDs, you must pay taxes annually on the interest earned even if you haven’t withdrawn any money. Alternatively, fixed annuity earnings are tax-deferred. You only pay taxes on interest earned when you withdraw money from the annuity. This means that you end up earning an increasing amount of money with fixed annuities because the deferred tax on your interest remains in the investment instead of being paid out to state and federal taxes each year.

CDs aren’t as flexible

Fixed annuities also offer more flexibility than CDs. With a CD, you cannot remove any money before the term is over without incurring an early withdrawal penalty. Although fixed annuities also have early withdrawal penalties known as surrender charges, they include provisions that typically allow you to withdraw 10% of your investment value each year without penalties. Additionally, with many fixed annuities, you can withdraw the earned interest on your investment each month.

Some fixed annuities offer you access to the sum total of your investment funds in the event of a financial hardship. For example, you may be allowed to withdraw from your fixed annuity penalty free if you are hospitalized, develop a life-threatening illness or are forced to live in a nursing home for an extended length of time. With a fixed annuity, you can also choose an option to receive a predetermined amount of income from the investment over a fixed time period, such as five or ten years. This option offers enhanced income security while spreading out any taxes that your earnings might incur over many years.

Annuities are extremely safe

While CDs are issued by banks, annuities are issued by insurance companies. As compared to banks and brokerage firms, insurance companies have a historical record of stability. This is largely because insurance companies offer conservative investment options that carry very little risk.

Just think: insurance companies have survived times of war, global depressions, government failures, industry scandals and disastrous stock market plunges. However, in even the worst of times, Americans have been able to safely insure their homes, health, life, cars and businesses.

Survey says…

All things considered, fixed annuities are a solid option for retirement-focused investors. These superior, reliable investments can provide higher returns, tax advantages and enhanced flexibility, all while providing safety and security. Not to mention that fixed annuities can generate a guaranteed stream of income.

Talk to Brian Gruss today about whether a fixed annuity is right for you.

Liquidated earnings are subject to ordinary income tax, may be subject to surrender charges and, if taken prior to age 59 1⁄2, may be subject to a 10% federal income tax penalty.

Guarantees and payment of lifetime income are contingent on the claims paying ability of the issuing insurance company.

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Let’s take a apples to apples approach at looking at some of the differences between a CD (Certificate of Deposit) and a annuity.

CD’s have immediate tax liabilities,; this creates the need for a higher rate of return

With a fixed annuities, you will eventually have to pay taxes on the money you withdraw.  However, as the numbers below shows, fixed annuities require a much lower interest rate to generate the same return as a CD.

For example, if your income places you in the 28% tax bracket and you purchase a tax-deferred fixed annuity with a guaranteed interest rate of 4.25 percern, you’d need a CD with an interest rate of more than 5.9 percent to outperform the annuity.

Now let’s say that your income places you in the 25 percent tax bracket and you purchased a fixed annuity with a guaranteed interest rate of 3.5 percent, you would need to purchase a CD with an interest rate of more than 4.67 percent to outperform the annuity.

If your CD’s are not performing like you would like them to, let’s talk about how annuity might be able to help you out.  I offer annuities through multiple carriers and ranging in years from 2-14.

Oh and with most annuities unlike most CD’s you can withdraw a portion of the annuity without any penalties from the carrier.

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Retirement Planning: The Advantages of Fixed Annuities

A fixed annuity is a contractual obligation rendered by an insurance company with a pledge to disburse income to a recipient based on a fixed return on investment. Therefore, they are ways for the holders of such instruments to be guaranteed future dividends or a source of income. That’s why, when selecting from the variety of annuities available, annuities are a logical choice to make for retirement planning.

Fixed annuities have a rate of return or ROI that is equal to the rate of return of the market. Therefore, they offer a lower risk to the consumer and, as a result, more financial security. Comparatively, variable annuities incur more risk for the consumer. Variable annuities typically glean a higher return rate although the holder of these types of instruments is also more vulnerable financially. Therefore a greater risk is supplied. Subject to market rates, you can possibly lose a portion of what you invest.

On the other hand, fixed annuities offer the convenience and comfort associated with a lower-risk instrument. The holder of the annuity simply opts for a lower rate of return. You might say a fixed annuity can be likened to a CD, except you realize a far greater return on your investment because your money is committed for a far longer period of time.

Investing in fixed annuities is financially sound from a tax standpoint as all deposited funds in such annuities are tax-deferred until which time you decide to receive income from the annuity. At that time, taxes are taken out only on the income growth, thereby making these types of annuities ideal for retirement planning.

Because of the tax advantage, these products are used primarily for long-term planning purposes. In other words, income cannot be collected from the annuity prematurely, which means before the age of 59 ½, as the holder can be assessed taxes, fees, and penalties. Also, surrender charges are imposed if you choose to cash in your annuity before the specified time. The charges can be excessive so one should consider them for long-term investment purposes only.

If you are truly serious about planning for retirement and are someone who needs a financial product that provides a minimal amount of risk, a fixed annuity may well be worth your consideration.

Take time out to contemplate all the pros and cons of owning such an instrument. For retirement planning purposes though, fixed annuities are ideal because, as previously stated, they offer a tax advantage for the consumer.

Additionally, the opportunity to invest in other enterprises is increased because of the annuity’s tax benefits. You can become prosperous with your short-term investments while investing in a solid financial product in order to secure your future income needs.

In summation, fixed annuities provide the kind of financial security you need now to realize monetary growth in other areas, and the assurance that you will be provided an adequate future return on your investment.

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