Fixed Annuities vs CD Annuities

There are a number of available investment plans that you can take advantage of. With retirement in mind, perhaps it would be beneficial to consider an Annuity.

In the simplest word, an annuity is a type of an insurance program wherein you can invest your money at a certain period of time or term and your money receives interest within the period it stays with an insurance company. The interest is then paid out at a certain amount over a period of time. It could be at any interval as specified. In other words, you invest your money and as it earns an interest, it can be paid out like an income stream.

Here’s a closer look at the most common types, Fixed Annuities vs CD Annuities. Both are interest earning investments highly recommended to save up for retirement. There are basically three steps. One, you pay out an initial amount or what is called a Premium which can range from $5000 to $1 million. Two, you choose from the terms offered. You can keep it invested for a short, medium or long term. The term ranges from 3 to 15 years. Basically, the longer you leave your money invested, the higher the interest your money earns. The interest depends on the current environment. Three, you can then collect your money in an income basis where you get to be paid out monthly or at any interval over a period of time. This is like getting a salary in exchange for your investment.

The main difference between these two products is the interest. Both have guaranteed rates. For the Fixed type, the guaranteed rate stretches over time but may not necessarily cover the full term. Say, you chose a 10 year term at a 5 percent interest. Upon your investment and for the next 5 years it will earn that interest but for the succeeding years, it may get a different rate. On the other hand, a CD type will earn the same guaranteed for the full stretch of the term you signed up for. 

There are various reasons why these types of products may be preferred by some people. For one, the risk of principal loss is low. The closer a person gets to retirement, usually they like to reduce the risk exposure of their investments, and the two products are not very volatile.  Also, they provide an income stream for retirees similar to a pension, which is also a benefit. 

Annuities are best suited for long term investors.  Any withdrawal prior to age 59 ½ is subject to a 10% tax penalty as well as regular income tax.  Annuities often also have a surrender schedule, meaning that withdrawals may be subject to a penalty by the insurance company if not left in for a predetermined amount of time.  Any guarantees on principal invested is based upon the claims paying ability of the underlying insurance company and are not FDIC insured.  Although these types of annuities do not participate in market risk, other types of risk such as interest rate risk may apply.