Quite well. To begin with, the interest compounds, tax deferred. With a Certificate of Deposit, or CD, you must declare the interest each year on your tax return. Secondly, annuities pay a higher interest rate. You’d have to lock in a CD for 10-years to get the same rate an annuity would pay out with a 3-year contract.
The most important advantage Annuities have over CDs is that they can provide lifetime income EVEN IF YOU OUTLIVE YOUR MONEY. The annuity can still pay a monthly income. It will depend on the settlement option you take when you start taking income.
CDs will ALWAYS lose money to inflation. It’s just the way they are set up. If you have $100,000 in a 1-year CD, and it gets the typical 0.5% interest but inflation is 2.5%, you have effectively lost $2,000 in buying power. In any given year, every dollar will only buy so much in goods and services. It doesn’t matter what the actual numbers on your account say… it’s what those numbers will purchase.
This reminds me of my Mother. Back in the 1970s, she said she had $8,000 and told me to go buy her a new Buick. So, I did. Twelve or thirteen years later, she told me she had another $8,000 saved and asked me to buy her another new Buick. Fat chance, right? You all know what I’m talking about. What kind of a house would $100,000 buy you in 1999 and what kind would it buy now? Whether it’s steak, houses, cars, or toilet paper, prices go up each year and the buying power of the dollar goes down every year. When you are earning less than inflation you are losing money.
This brings up the point that CDs are government guaranteed. Guess what? So are annuities. Because I am not selling you a specific product, I can tell you that every state has an Insurance Guarantee Association that guarantees the principle in your annuity.
No, it’s not as good as an FDIC guarantee, but its very close here in California and I imagine it is in your state, too. When you add the fact that, if an insurance carrier goes belly up, they have assets to sell, and combine that with your state’s guarantee, you’ll come close to getting all your money back.
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