CDs vs. Annuities: How To Choose the Best Investment for You

05/05/2024

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When it comes to choosing between Certificates of Deposit (CDs) and annuities for your investment strategy, understanding the key differences and benefits of each can guide you to the best option for your financial goals. Both are popular options, CNBC reported a statistic from LIMRA, showing, “Americans have bought about $360 billion of annuities in 2023.” And around 6.5% of Americans own a CD account, which may seem low, but has shown to be a much higher percentage than previous years, and is only getting more popular as Americans became more aware of them.

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When seeking out advice from experts you’ll find many different opinions. For example financial guru Suze Orman has her pros and cons with CDs, saying, “Ever since the financial crisis began in 2008, it has generally not been possible to earn much of an APY (annual percentage yield) on most CDs.” And, she added, you shouldn’t look at CDs as a magical solution for retirement savings. “To have the best shot at earning long-term inflation-beating gains, you need to be invested in the stock market. But for the safe part of a diversified portfolio, CDs can be a smart complement to savings accounts,” Orman wrote.

Essentially this is the type of advice you get with annuities and CDs: a pros and cons list, but ultimately depends heavily on your current financial situation. To help you better on your choice, here’s a detailed comparison to help you make an informed decision.

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Certificates of Deposit (CDs)

What are CDs? CDs are time-bound savings accounts offered by banks with fixed interest rates and maturity dates. When you invest in a CD, you agree to leave your money in the bank for a predetermined period, ranging from a few months to several years.

Benefits of CDs:

Security: CDs offer a safe investment option as they are FDIC insured up to $250,000.
Predictability: With fixed interest rates, CDs provide predictable returns, making them an excellent choice for risk-averse investors.
Accessibility: CDs are widely available through banks and require no extensive knowledge to get started.

Considerations:

Lower Returns: The safety of CDs comes with lower returns compared to other investment vehicles.
Liquidity Issues: Early withdrawal from a CD can result in penalties, which might negate any interest earned.

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Annuities

What are Annuities? Annuities are financial products sold by insurance companies designed to pay out a steady income over time. They can be purchased with a lump sum or through payments over time.

Benefits of Annuities:

Income Stream: Annuities provide a guaranteed income stream for a period, which can be for life, offering a reliable retirement income.
Tax Deferral: Investment in an annuity grows tax-deferred until withdrawals are made.
Flexible Options: Annuities come in various forms, including fixed, variable, and indexed, allowing investors to choose based on their risk tolerance and financial goals.

Considerations:

Complexity: Annuities can be complex. Fees and terms vary widely, which might make it challenging to choose the right type.
Costs: High fees can often be associated with annuities, potentially reducing the net benefit.

How to Choose

Consider Your Financial Goals:

If you seek a short-term, low-risk investment, CDs might be more suitable.
For long-term goals with a need for steady income, particularly post-retirement, an annuity could be more appropriate.

Assess Your Risk Tolerance:

CDs are ideal for those with a low risk tolerance.
Annuities might involve higher risk, especially with variable annuities linked to market performance.

Evaluate Your Need for Access to Funds:

CDs are better for those who may need access to their funds after the term ends without ongoing income needs.
Annuities are suitable for investors who prefer a steady income stream and can commit capital for a longer duration.

According to Thrivent on choosing between an annuity or CD, they suggest, why not both?, saying, “you don’t need to choose just one. You might want to use CDs for short-term goals alongside a fixed annuity for tax deferral and the lifetime income option.”

In conclusion, whether CDs or annuities are better depends on your individual financial situation, goals, and risk tolerance. It’s often beneficial to consult with a financial advisor to help navigate these choices and decide the best investment strategy tailored to your needs.

Editor’s note: This article was produced via automated technology and then fine-tuned and verified for accuracy by a member of GOBankingRates’ editorial team.

Certificates of Deposit (CDs)

Annuities

How to Choose

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