In an article for BankRate, Karen Bennett discussed whether CDs or annuities are the best option for someone saving for retirement. Both are low risk compared to other options, however there are some important differences.
A CD pays a guaranteed rate of return for a certain amount of time, but the funds are completely locked up for the entire term at which point the principal is returned. However if the money needs to be accessed early, then there is likely to be a penalty which negates the earned interest and even potentially cuts into the interest.
In contrast, an annuity is a contract that guarantees a certain amount of income for an upfront cost. Typically, annuities last for the remainder of one’s life, or it can be for a pre-set length of time. Typically, the counterparty in an annuity is an insurance company. Annuities also come in many forms. They can be structured to allow one to build wealth in a retirement account, or it can be like life insurance and pay out a benefit upon death.
Some differences to consider are that annuities typically pay higher rates than CDs, offer similar amounts of security, higher taxes on income from CDs, and higher penalties for annuities if you need to access your principal.
Finsum: Annuities and CDs are low risk ways to build wealth for retirement. Here are some differences to consider.