Ahh, the infamous question of what kind of fixed income investment is the best. We’ll try to answer this question, laying out the pros and cons, and how you should evaluate what is best for your situation.
It is obvious from the comparison that you’re looking for a solid, predictable, fixed income investment, likely for retirement income. You’ll find that both annuities and CDs are very different, but for practical purposes are very much the same.
Annuities, especially prepaid and insured annuities (those that pay until the day you die) allow for greater predictability. Since you know you’ll be receiving a fixed payout for the rest of your life, you won’t have to worry about running out of money as you would with CDs. Also, annuities allow you to draw down on your principal without any concern. You can’t say that for certificates of deposit.
One last benefit of fixed annuities is that you won’t have to deal with the fluctuations in interest rates. CDs that yielded as much as 5-6% during the early 1990’s are now yielding less than half a percentage point in 2010. So, ask yourself, is that the kind of volatility you want in your retirement income? What if you had retired at the age of 65 in 1990, making more than 10 times the income then as you do at 85? Prices have surely risen since 1990, especially in health care, food, and energy prices, all of which you’ll consume the same, if not more at 85 than you would at 65.
Oh, and we didn’t even touch taxes! Growth in the accumulation phase of an annuity is tax free. You only pay as you make withdrawals.
CDs have benefits too
CDs certainly have their own benefits over annuities. First, certificates of deposit allow you to keep your principle investment while collecting interest monthly, quarterly or annually. Another benefit, if you have enough cash to make it through, is that upon your death you’ll be able to pass the principle investment onto children, grandchildren, who can set it aside for funeral and burial costs or even to start a college fund for the youngsters. It’s hard to put a price on generational wealth.
One major benefit is that should live less than your life expectancy, you’ll still have cash leftover. With annuities, the payouts cease at the time of death, and you’ll have lost everything unless you have insured your plan, or it allows for a cashout at death. Annuities that have the cashout option are generally more expensive, so you’ll have to price that in to your planning.
Get the best of both worlds!
We’d recommend that if possible, consider investing in both annuities and certificates of deposit. This way you’ll be able to get consistent cash payments from your annuity, as well as generate passive income from your CD investments.
Diversifying your wealth into both investments is a smart decision. You’ll have the safety of annuities as well as the opportunity to take advantage of high interest rates with CDs during the good years. Even into retirement, diversification is still very important, and you wouldn’t be wrong to invest in both.