A reader inquires about the distinctions between CDs and annuities.
Q: Can you clarify the differences between annuities and certificates of deposit (CDs)? Would either be a suitable choice for my retirement strategy?
A: Although both CDs and annuities have some points in common, they are fundamentally different financial instruments. CDs are typically designed for short- to medium-term savings, while annuities serve as long-term retirement investments. Let’s break down each option.
A CD is a “time deposit account,” a savings tool where your funds are locked in for a predetermined duration. They usually offer a fixed interest rate that is often higher than standard savings accounts, along with a specified maturity date that can range from a few months to several years. Generally, the longer your money remains in the CD, the greater the interest you can accumulate. It's your choice whether the rate difference justifies keeping your funds untouched for extended periods.
Annuities encompass various insurance products and investment options. Certain types, like immediate fixed annuities and deferred fixed annuities, are acquired to provide a specific income stream during retirement, either immediately or at a later date. Other annuities allow you to save money for growth and decide later how to access those funds (via withdrawals or a regular income).
You might be confused by the Multi-Year Guaranteed Annuity (MYGA), which often serves as a substitute for CDs. With a MYGA, you save money for a set number of years and then either begin receiving income or roll it over into another annuity, similar to a CD rollover. For a solid overview of MYGAs, check out this resource.
