Annuities Vs Cds

CDmanFL | Jan 16, 2022 | 286 posts since 2019

Thanks to this website, I’ve locked most of my money in 5 year CDs maturing in late 2023 and the first half of 2024. Like my fellow savers here, we’re all hoping that CD rates rise by the time these CDs mature. But if forever reason they don’t, I’m thinking about moving to annuities where I can get even higher yields but that comes with the sting of giving this money away. I don’t have kids and I can’t take the money with me, but I need to survive by living off my savings. I’m looking at annuities in the vein that they are just long term CDs where I can’t touch the principal. Curious to know what other folks are doing and thinking in this regard. Your insights are always helpful.

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Answers

Infinityy | Jan 16, 2022 | 107 posts since 2020

Multi-year guaranteed annuities (MYGA) work similar to CD's, you can access the principal upon maturity. However, they are not federally insured. Instead, they are primarily insured by the life insurance company and secondarily by your state's guaranty association (which is not backed by your state government, but by the group of life insurers licensed in your state). You can hedge your risk by considering the creditworthiness of the life insurance company and keeping your MYGA purchases within your state's guaranty association limits.

MYGA typically pay 1-2% more than CD's of similar terms, and the interest accrues tax-deferred until withdrawn, but MYGA have significantly harsher early withdrawal penalties. There is also a tax penalty if you withdraw money before age 59.5.

Single premium immediate annuities (SPIA) will provide significantly more income, depending on your age, but if you purchase these, you permanently forfeit access to your money. However, non-qualified annuities can be very tax-efficient because a portion of the monthly payment is treated as a return of principal and not taxed. The monthly payment generally will not be adjusted for inflation, which could begin to pose a problem over time.

I think a very conservative investor would be well-served keeping 20-30% of savings in stock, and the rest in a combination of CD's, I-Bonds, Treasuries, and annuities

CDmanFL | Jan 16, 2022 | 286 posts since 2019

Thank you. Gives me a lot to think about.

Infinityy | Jan 17, 2022 | 107 posts since 2020

I will also add, MYGA and SPIA are the only types of annuities I would ever consider purchasing. The rest (variable annuities, indexed annuities, etc) are mostly junk with high fees and low returns.

CuriousDave | Feb 14, 2022 | 233 posts since 2018

The "significantly more income" is not all income. It includes a return of principal. Brokers love to advertise how much higher SPIA "returns" are versus CDs but don't mention that the "returns" include a return OF some of your money rather than simply a return ON your money. That makes it difficult to compare interest rates on SPIAs with rates on CDs. With SPIAs that are purchased for life, the true interest rate cannot be computed until death because the term of the annuity is unknown until then. Non-qualified SPIAs are no more tax-efficient than CDs purchased with after-tax money because there is no tax on the return of CD principal, either. The money used to purchase a qualified SPIA originates from retirement plan money that becomes taxable upon reaching RMD age in rthe case of traditional IRAs or, in the case of Sec. 401(k) and similar qualified retirement plans, upon retirement from work. Also, beware the "premium tax" fthat some states impose on the purchase of immediate annuities, which reduces the principal amount of the SPIA from the get-go and therefore reduces your annuity income as well. The tax rate on non-qualied money is generally a lot higher than on qualified money:
https://www.immediateannuities.com/state-premium-tax/

Choice | Feb 14, 2022 | 937 posts since 2020

SPIAs are also used to park money with an immediate monthly payout to/for stay at home spouse where other spouse needs to qualify for Medicaid/Medi-Cal for nursing home expenses …payout time is based on irs lifetime expectancy tables… interest rate is inmaterial…merely a sanctioned way to exempt assets immediately for the benefit of that stay at home spouse.

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