CD's vs.Annuities In A Low-Interest Environment

In the last few years, the Federal Reserve has kept interest rates low in an effort to keep inflation at bay.  For some people, like those refinancing a home or other debt, this is great.  However, it makes it difficult for people who are trying to make a few dollars in a conservative fashion.

For instance, CD's have traditionally been a safe haven.  The bad news is that the interest rates on these are very low, between 1-2%.  When you consider that inflation runs around 3%, the money is actually losing value.  

An alternative to this dilemma of late has been an annuity.  Specifically, a fixed indexed annuity, which offers growth with downside protection.  These annuities typically have "caps", which is the maximum rate of return the annuity offers.  In recent years, these caps have dropped significantly.  

Complicating matters, agents are promoting annuities with 7 and 10 year contracts, with hefty surrender charges for early withdrawals. And at the end of the contract, some of the annuities require annuitization (taking an income stream).

A reasonable alternative is a shorter term annuity with no annuitization requirement. With interest rates slowly creeping up, it makes sense to purchase a 3 or 5 year annuity that can be annuitized OR taken as a lump sum.  And it will still earn more than that CD at the bank!

Before you attend a "retirement seminar" for that free lunch, contact us and let us show you several options to help you make an informed choice.