What to Expect
Fixed annuities commonly offer interest rates of 4-10%. The insurance provider and the contract’s term will determine the actual rate. Longer terms of 5-10 years offer rates upwards of 8-10% — these are the real money-makers. Even though a 2-5 year annuity is still preferable to CD, a 10 year annuity has unmatched growth once tax-deferral kicks in.
Fixed Annuity vs CD vs Money Market
Here we see the big-picture: the performance of a fixed annuity, CD, and money market account over 20 years. The assumed initial investment is $100,000, with a 33% tax bracket. The CD fares well until the 10 year mark, but then it starts to lag significantly. At 3%, the money market can’t keep up at all.
Notice the annuity/CD difference after 20 years: $60,000! Clearly tax-deferral pays off.
Fixed Annuity Outpacing CD
This graph shows how much more a fixed annuity earns than an equivalent rate CD. Even after the second year it starts to outperform the CD, but as this graph shows, tax-deferral becomes more and more meaningful with time. And, for every point above 8%, savings increase exponentially.
Pocketing the Difference
Zooming in on years 6 through 10, we can see exactly how much this hypothetical investor saved by choosing a fixed annuity over a CD. In this case, the annuity investor is $9,000 richer after 10 years. After 20 years, he’d be $60,000 richer.
Conclusion
When comparing fixed annuities and CDs, the numbers clearly favour annuities. Moreover, CDs don’t offer much in the way of redeeming features: they have withdrawal penalties just like fixed annuities and they’re no more secure. In fact, annuities have better features:
- Generally higher rates
- Penalty-free withdrawal allowances
- Death benefits
- Probate avoidance
- Lifetime income option
The only case in which it’s advisable to purchase CDs is if the investor is well below 60 years of age (because of the potential 10% IRS tax penalty). For investors over the age of 59.5, fixed annuities are the better choice.
The other conclusion to draw from the above example is the exponential significance of long-term annuity investment. If you’re looking to generate a large retirement savings, fixed annuities can help you meet that goal better than CDs or a money market account. The key to success is to start early and be persistent. Request a free fixed annuity product comparision today. A licensed annuity specialist can jump-start your retirement for free.