Are Fixed Annuities the Best CD Alternative?
Many people are looking for a CD Alternative in today’s low interest rate environment. Often fixed annuities are considered, along with bonds and money market accounts. Let’s compare these three popular CD alternatives so you can decide which is the best option for your savings.
Fixed Annuity as a CD Alternative
Fixed annuities are a common alternative to CDs. There are a few different variations of fixed annuities. Most often used as a CD Alternative is the Fixed-Rate Annuity, otherwise known as a MYGA (Multi Year Guaranteed Annuity). This provides a fixed interest rate for a set number of years.
The largest benefit of a fixed annuity is that you are often able to find a much higher interest rate than what a CD or investment-grade Bond pays. At the time this article was written, the national average for a 5-year CD is slightly over 1%. But you can find a 5 year fixed annuity that gives you 2.7% apy.
Fixed rate annuities also give you tax deferred growth for your savings. With bonds or CDs, your earnings are taxed each year unless the account is an IRA. But even with non-qualified money… Non-ira money… A fixed annuity allows your funds to grow tax-deferred.
Fixed annuities are issued by top rated insurance carriers. Most fixed annuity carriers featured on fixed annuity for me.com have an a rating or higher. The lowest rating that I personally am willing to recommend is a B+ + rating. This would be equivalent to the lowest grade bond that is considered investment grade.
It is always important to review the independent Financial ratings of the carrier before you purchase a fixed annuity from them. Choosing an insurance carrier with a rating below b + + is not considered a safe option by many Financial experts. Just like with bonds, fixed annuities are secured by the claims-paying ability of the company that issues them. Insurance companies, especially companies with AV plus plus rating or higher, have an excellent track record of staying in business and paying benefits on time and as promised. The amount of insurance company failures is a tiny fraction compared to the amount of bank failures. Insurance companies also are highly regulated and reviewed each year by State regulators. The states have created a safety net system in the event that an insurance company becomes financially insolvent. You can read more about the safety net system here at the NOLHGA website.
The last benefit to review about a fixed annuity is the liquidity option that most have. Most fixed annuities offer you penalty-free withdrawals up to 10% per year. Anything over 10% is subject to an early withdrawal charge. But this is a very unique feature compared to bonds and CDs.
Other CD Alternatives
There are many different types of bonds out there. The most commonly used as a CD alternative are government bonds and investment-grade corporate bonds. These pay out a set amount of interest to you over a set amount of time. You do not have any liquidity other than the yearly interest. You may get your money back early but it will be a reduced amount. Current yields for a 5 year US Treasury bond is around 1.06%. The current yield for a 5-year Us corporate bond is a round 1.7%. As you can see, the commonly used Bond options for a CD alternative do have higher interest rates than what CDs offer. However, they are not as high as what a fixed annuity is able to provide.
Money Market Accounts or Funds
Money market accounts or money market funds are another common CD alternative. Currently, you can find money market accounts at banks with rates as high as 0.8% per year. You can find money market mutual funds with yields as high as 1.2%. Money market accounts are similar to a savings or checking account at a bank. Oftentimes there can be high deposit requirements or certain restrictions on withdrawing funds. A money market mutual fund is a registered security investment product. It is sold by a stockbroker and bought at a discount. Most people use a money market account at a bank for their CD alternative and not the mutual fund version of a money market. For our discussion in this article, we will assume that a money market account at a bank is being used for the CD alternative.
So which is the right CD alternative for my situation?
This all depends on what you need your savings to do and what features you are comfortable with. If you want the highest possible return then a fixed annuity may be the best option for you. If you need immediate 100% liquidity, then you should go with a money market account at a bank. If you want the safest possible investment there is, then a US treasury bond would probably be the best option. But if you want the best combination of return comma access to funds, and security; then a fixed annuity just might be the best CD alternative for your situation.
If you would like to talk about how a Fixed Annuity could benefit you as a CD Alternative or otherwise, feel free to contact me using the form to the right or on my contact page.