Seniors rightly focus on investing their retirement cash correctly. Even though the interest rates are lower in comparison to other investment options like fixed annuities, they like depositing their money in FDIC insured certificates of deposit (CDs). We will look into both these investment options and see what one is the best for you.
Safety - CDs vs Fixed Annuities
A lot of the national and international banks provide certificate of deposits at different interest rates and with guarantees. In the US, he FDIC provides guarantee for CD investments up to $250,000 (through December 31, 2013). What does it indicate? Even banks fail and the FDIC will return the money as stated in the certificate. To acquire this benefit, it is always recommended to invest in several banks should you be considering to invest more than the covered amount.
Fixed annuities don't come with any federal guarantee. The financial strength in the company which offers fixed annuities is the guarantee you have. well that might not seem as securities you'd like, consider that companies like Prudential and New York Life lent money to the federal government during the great depression. There are private entities such as Moody's, A.M.Best, Standard & Poor's and Fitch that provide you with the financial ratings of the companies who sell fixed annuities. If you are planning to buy fixed annuities, examine whether the financial rating from the company is good enough to invest your precious money.
In addition to checking the company safety rating, also know that individual states regulate the insurance companies and also have state guarantee laws.Let us provide an example of Georgia Life and the Health Insurance Guaranty Association. The association provides assurance to $100,000 per policyholder by pooling the resources of the insurance companies within the state. note that the premise of the Association is to have sufficient funds should one insurance company felt. It is not prepared to handle the failure of many companies offering fixed annuities.
Return- CDs vs Fixed Annuities
The return on the investment in CDs and fixed annuities depend on the interest rates offered by the banks/annuity companies. Normally, the CDs offer a fixed interest rate for a fixed time period (typically from 6 months to 5 years). Generally, you get more interest for longer-term certificate. The interest you earn through these CDs is taxed annually. you pay tax on your interest whether withdrawn or not. So for a typical taxpayer, a 3% rate leaves only 2% to spend after taxes. It's on this issue of taxes that fixed annuities significantly outpace CDs.
The companies promoting fixed annuities offer interest rates either for the initial period of time or for many years, but the interest is taxed only up withdrawn. because the tax is deferred until withdrawal, the account grows much more rapidly. Additionally, fixed annuities will typically pay 1% more than CDs of the same term.
Investment Period CDs vs Annuities
The investment time period is also one of the important elements you need to consider before choosing between CDs and fixed annuities. Generally, fixed annuities are not issued for. Shorter than three years all the way through 15 years. So in general, fixed annuities have longer terms than CDs and also pay more. both CDs and fixed annuities have early withdrawal penalties if you withdrawal the account prior to the end of the term. In the case of fixed annuities, these early withdrawal penalties are called surrender charges.
Another difference covered in a separate post discusses the difference of CDs versus fixed annuities and how they can impact of taxation of your Social Security income.