Bank CDs or Fixed Annuities: What’s the Right Choice?

Everybody certainly would like to step into retirement with financial security. There are hordes of options to choose from if you are considering investment to make your retirement financially healthy. You will definitely not like to step into retirement looking for cheap debt consolidation services. One provision that most baby boomers look for in investments is the guaranteed rate of return. Bank CDs (Certificate of Deposits) and fixed annuities are two such popular options among the investors planning to retire. But it is necessary to ensure that you understand the difference between the two lest you end up choosing the wrong option for yourself.

Which option makes more sense?

A fixed annuity can be hailed as completely safe. With fixed annuity, the insurance company guarantees the principal and the fact that most of these insurance companies are running stable for many years makes it all the more reliable and trustworthy. An early withdrawal can invite a penalty but even then there is the guarantee that you do not suffer loss on the payments you made for the annuity. The scenario is different with bank CDs which are insured by the FDIC (Federal Deposit Insurance Corporation). On the event of the failure of a bank, the investors are bound by the FDIC to part with their own money to meet the legal limit set. Also, there is the risk of the investor suffering a loss on the investment amount if he is charged with penalty.

Tax issues

The best advantage that a fixed annuity offers is that it is tax deferred. In case of bank CDs, the investor is liable to yearly taxes on the interest. The large number of people opting for fixed annuities bear testimony to the fact that there is a quick growth of investment with fixed annuities. However, it is important to consider the tax implications to understand the yield on a CD or fixed annuity. Annuities are taxed on their profits, but this happens only when you withdraw gains from the annuity.

Early withdrawals

Although annuity is a long term contract, they are more liquid than the CDs. There is also the offer of penalty free withdrawal of up to 10-15% per year. This can also hold true in the event of a medical emergency. But cashing out your CD early will cause you to pay early-withdrawal penalties.

Also, if you want to stay risk-free from the fluctuations in the stock market, it is advisable to diversify your portfolio. However, if you find that you can’t afford to diversify your investments, you should at least consider diversifying within fixed products. And for this, fixed annuity is your answer.

Annuity can prove to be a wise option for your retirement savings. Breaking away from the traditional choice of bank CDs can be fruitful for you if you start investing in fixed annuities. But it will be wrong to say that annuities are always preferable to CDs. Depending on certain situations, bank CDs can be a better investment. Before taking any decision, have a thorough discussion with a licensed agent to determine which investment is most appropriate for you. With proper planning you can rediscover the joy of post-retirement life.