Q: Can you please explain the difference between annuities and certificates of deposit (CDs)? Would one of these be a good addition to my retirement plan?
A: While CDs and annuities share some similarities, they’re very different financial products. CDs are best for short- to medium-term savings, while annuities are typically long-term retirement investments. Here’s the scoop on each.
A CD is a “timed deposit account,” basically, a savings vehicle where your money is locked in for a fixed period. CDs offer a fixed interest rate, usually higher than a standard savings account and a set withdrawal date, ranging from months to years. Generally, the longer your money stays put, the more interest you earn. It’s up to you whether the rate difference between, say, a three-month and a six-month CD is worth leaving your money untouched a bit longer.
Annuities are a category of insurance products and investments. There are some (immediate fixed annuities and deferred fixed annuities) that you purchase in order to generate a specific amount of income in retirement, either right away or down the road. There are others in which you save money to grow and make a decision on how you get your money out (withdrawals or an income stream) down the road.
Where I think you’re confused is that there is an annuity called a MYGA, which stands for Multi-Year Guaranteed Annuity, that is often used as a CD substitute (or vice versa). You save money in a MYGA for a period of years, then start taking income down the road, or roll it (like you’d roll a CD) into another annuity. If you’re looking for a good MYGA primer, check out this one from our friends at Gainbridge.
