subject: How A Cd Compares To Deferred Annuity On Safety, Return, And Investment Time [print this page] Retirees with cash often seek an investment with a lot of safety. Holding a certificate of deposit (CD) gives you that safety but sacrifices investment return. Let's compare a CD to a deferred annuity for safety, return, and investment time. Then you can choose what's best for you.
*The safety issue:
Banks hold CDs. The Federal Deposit Insurance Company (FDIC) guarantees any investment in a bank up to $100,000 against the bank's failure. If you plan to invest more than that, spread it between different banks - not different accounts in the same bank - so all your holdings are FDIC guaranteed. Bank failures are not all that uncommon.
A deferred annuity hasn't any FDIC protection. But it's still considered a safe investment. It's backed by the financial strength of the company that holds it. Before buying a deferred annuity, check the insurance company's financial rating. Independent rating companies such as Moody's, A.M. Best, Standard & Poor's and Fitch provide this information to you.
As a safety backup in case of failure, many insurance companies are affiliated with a guaranty association in their state. One example is the Georgia Life and Health Insurance Guaranty Association in Georgia. It provides total annuity cash surrender protection per owner per insurance company of $100,000. Again, to hold more than that you should spread it among different companies with such a guaranty. Insurance companies fail far fewer times than banks do.
*The Return Issue:
Your return for CDs and deferred fixed annuities depend on their interest rate earnings and taxation. CDs offer guaranteed interest rate for a fixed term - the shorter the term, the lower the rate. All CD earnings are taxed annually - whether you withdraw money or not. This yearly taxation loss reduces the annual compounding of a CD's return.
A deferred fixed annuity can guarantee an interest rate for an initial period. Then, its interest rate may be adjusted periodically. But earnings of annuities are tax-deferred. So at equal interest rates, your savings will compound annually faster than for a CD. Earnings are taxed only when you withdraw them.
*The Investment Time Issue:
Withdrawing money before term for a CD will bring a penalty. And an early surrender from a deferred annuity will penalize you too. So if you're planning on using most of that money within a year or two, then a one or two year term CD is probably the better choice. But if you plan on holding for the long term a deferred fixed annuity may be more advantageous.
You just need the current interest rates and early withdrawal penalty features of CDs and deferred annuities to make an informed decision.
