CD vs. Fixed Annuity For Retirement Savings
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Bank CD or Annuity for Retirement Savings?
Well, a lot of us have been struggling with our retirement accounts lately. I know that it was discouraging for me to watch my stock based IRA take a huge hit last year. And even though it is creeping back up, I have not recovered my retirement savings to pre-2009 levels. It is hard to watch money evaporate when it was such a tough battle to sock it away in the first place.
Safe Money?
So let’s take a look at some safe money investments. This is what bank CDs and fixed annuities are usually called because they have guarantees from banks or insurance compaies that no money will be lost when the market goes down. But is this really true? Well, you really have to consider inflation and the affect of taxes before you can actually say you did not lose any money.
Are Fixed Interest Rate Savings Products Like Bank CDs Really Making Money?
In 2009, the inflation rate was considered low at less than 2%. But if your CD was only paying 2%, you only broke even there. Even if you earned a bit more, you could have been taxed upon your interest, and this lowers your effective return. Since tax rates vary by income, you will have to figure this out for yourself. But you understand that if you paid the governnment 1%, and you lost 2% to inflation, you need to make more than 3% to break even.
And right now, as I skim over internet information on bank cd rates, I see that it would be tough to even find a CD that pays 3%! It looks like 2% is more realistic. Tough times for savers.
Add in a devalued dollar with less purchasing power, and it is easy to see that many of us also lost value when we saved with a fixed product like a CD. On the other hand, we probably did not lose as much value as we did on some stocks that dropped 0% or more.
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It seems like it is just an effort to hold on. But stiill, bank CDs are considered safe money investments. Savings, up to a federal limit, are protected. While we may still lose some value, we probably won’t lose everything, or at least we will lose value at a slow enough rate (hopefully) to be able to recover.
What About Fixed Annuities for Retirement Savings?
Well if you had locked in a fixed interest rate annuity in previous years, you might have done ok. You can ignore the glossy ads that promise 2 percent returns from a bank because you locked in a six percent interest rate 2 years ago.
And your savings can grow in a tax deferred manner. That means you do not need to worry about gains until you start withdrawing. And when you do withdraw, in the future, you can often control the rate to minimize your tax liablity. The theory behind all of this is that when you retire, you will be in a lower tax bracket, and you won’t have as big of a tax bill anyway.
The problem is your money is probably locked away, or it will be penalized for early withdrawals. So deferred fixed annuities really work out well if you can live without the money for years.
Also understand that annuities are not federally insured or backed by the govenment. Fixed annuity contracts do come with guarantees from insurance companies. And even though several large insurers have been in financial hot water lately, that was with investors. The insurance industry is highly regulated, and we have not heard any news of actual policy or contract holders losing anything.
Learn More About Fixed Annuities
If you would like to learn more about annuities in your market, you can run some free online annuity quotes. This will give you local products and rates. Also read more about safe money retirement annuities.
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[...] 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. [...]