For many people, two of the top financial priorities in retirement are safety and income. CDs (certificates of deposit) and fixed annuities can provide you with both. Yet, there can also be some drawbacks to consider – and not factoring in these potential obstacles can have a significant impact on your future financial security and lifestyle.
But a CD annuity could provide you with a solution.
What are CD Annuities and How Do They Work?
The reality is that there is no such product as an actual CD annuity. But the term is still oftentimes used when referring to a multi-year guarantee annuity, or MYGA, because there are many similarities with CDs and annuities – particularly in the way they are designed and their methods of crediting interest.
For example, similar to a CD, multi-year guarantee annuities (MYGAs) credit a set interest rate for a specific number of years. Both the rate and the term are contractually guaranteed by the insurance company that offers the annuity. Likewise, the bank that offers the CD will dictate its interest rate.
Unlike a certificate of deposit, though, the interest that accumulates in the MYGA is tax-deferred. This means that there is no tax due on the growth until the time of withdrawal – and this can allow the account value to compound exponentially over time compared to a fully taxable investment (with all other factors being equal).
Taxable vs. Tax-Deferred Growth
In addition, while CDs and fixed annuities can both provide you with a set amount of interest that can be used as income in retirement, when the CD matures, the money will have to be reinvested – and if interest rates have fallen, your income could decrease.
This is not the case with a fixed (or fixed indexed) annuity, where you can lock in an income stream for a preset amount of time – like 10 or 20 years – or for the remainder of your lifetime, no matter how long that is.
This receipt of a known amount of cash flow can remove a great deal of income uncertainty in retirement, and as such, allow you to focus on other more important things, like spending time with loved ones, traveling, or even just relaxing at home.
Factors to Consider Before Buying an MYGA Annuity
Just like with any other “big ticket” item you’re considering, it is important to take a look at several key factors before purchasing a multi-year guarantee annuity. These can include the following:
- Surrender charge amount/time period
- Financial stability of the offering insurance company
Similar to with CDs, you can incur an early withdrawal penalty if you cancel an annuity during the early years. With many MYGA annuities, this period will frequently coincide with the length of the interest rate guarantee period. (Oftentimes, though, you are still allowed to withdraw up to 10% of the annuity’s contract value each year without a surrender penalty).
Also, annuities are sold through insurance companies. So, it is important that you review the offering insurer in order to determine whether it is financially stable and that it has a good reputation for paying out its claims. Typically, you can find more about an insurer’s financial strength by checking out its ratings from S&P (Standard & Poor’s), Moody’s, Fitch, and/or A.M. Best.
Is a Multi-Year Guarantee Annuity Right for You?
Even with all of the positive features that are offered with an MYGA annuity, these financial vehicles are not right for everyone. That’s because objectives, risk tolerance, and time frame can differ – sometimes significantly – from one investor or retiree to another.
With that in mind, it is important to discuss your specific needs and goals with a retirement income and planning specialist who can point you in the right direction. At Annuity Gator, our mission is to educate consumers and financial professionals on how annuities work, and whether or not they may fit into a portfolio.
In addition, we can compare the past and projected performance of different annuities – including an annuity that you already own – so that you’ll know what to anticipate. This, in turn, can reduce financial stress.
If you’d like to chat with an annuity specialist, you can contact Annuity Gator directly by calling (888) 440-2468 or sending an email to our secure online contact form. We look forward to hearing from you.