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Bank CD or Fixed Annuity for Safe Money Retirement Savings?

With all of the stock market fluctuations, it may be prudent to put part of our retirement savings in a safer investment or savings product. Storing cash under our mattress may not be very prudent, so the two investment vehicles that we learn about are bank certificates of deposit (CDs) and fixed annuities. So we need to compare – Bank CD vs Fixed Annuities.

Most people understand bank CDs, but annuities are more complex. You may also want to read more about Retirement Annuities – Safe Money Solutions. You can also review this page to explain annuities.

Advantages and disadvantages of bank CDs

Bank CDs are federally insured up to FDIC limits, so we are assured that our savings are backed by the US goverment. Interest rates are posted, and in most cases they are valid for the life of the contract. There are some exceptions to this, but they will be clearly documented before you purchase.

So the advantage of a bank CD is that you will earn a guaranteed reeturn on your money that is probably backed by the strength of the US federal governmet’s savings insurance program (FDIC). The actual contract terms are of varying lengths. In general, the longer the term and the more money you have to save, the better interest rate you will get. However, banks are very competitive with rates, so it pays to shop around for the best rates.

Another advantage is that you can choose from a variety of term lengths. So you can stagger CDs so you will have access to chunks of your money periodically. For example, you may choose to buy multiple products, one with a length of 6 months, one with 18 months, and one with 3 years. That way, you can make a decision about the use of some of your money every six months without paying a penalty.

The disadvantage of bank CDs are as follows. You will lock your money up for the contract term, or you must pay a penalty. Right now, CD interest rates are pretty low, so with inflation, your money may actually lose purchasing power even though it grows by a percentage point or two.

Advantages and Disadvantages of Fixed Annuities

Fixed retirement annuities are also considered safe even if they are not backed by the FDIC. They are backed by the power of the strictly regulated insurance industry. During the recent financial crisis, we may have heard about stock holders losing money in insurance companies. But it is important to note that we did not hear of policy or contract holders losing money.

You also specify a term length for your contract, but these terms are probably much longer. Think about years instead of months. So you must be willing to lock up your money for years or risk paying a surrender charge. In general, fixed annuities are for long term planning. There are some exceptions to the penalties, like serious illness, so you have to look at the specific contract for more information about this.

The return rates may be higher than bank CDs, so that is the trade off for locking up your money longer. Another type of fixed annuity is actually tied to a market index like the S&P 500. That means that during good years it will return rates that are tied to the stock market, so your money should do better than bank savings. During down years, there should be a guarantee of earning at least 2 – 3 percent, so you will still probably be doing as well as you would with a bank CD.

Are Cds or Annuities Better?

The choice, of course, must be made by considering your own individual situation. If you are very worried about risk, and if you want to access your funds every few months, you may choose a CD. If you are sure you can wait to touch your capital, and you want better returns with a guarantee, consider an annuity.

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