Comparing CDs and annuities for savers


Most research and analysis on the relative merits of multi-year guarantee fixed annuities and bank certificate of deposits (CDs) are heavy on the data and can be confusing to some investors.

The problem isn’t really with CDs, which are fairly easy to understand. Take your money to the bank, go home with a certificate, and simply retrieve your principal and interest in five years (or one or three or whatever). Everyone understands CDs. They’re no-brainers.

Annuities? The very term renders one dumbstruck. They’re the haziest of retail “investments.” Generally, they’re not even investments. They’re insurance products that mostly ensure that the buyer will, at some point, receive a stream of payments that usually include part earnings and part principal. The confusion has begun already.

And they come in so many varieties that most people who buy them don’t understand how they work. They know only that they own one and that it was sold to them as a prudent and wise financial move.

But amid all of that fog sits one type of annuity that’s fairly straightforward and better meets the definition of “investment.” The multi-year guarantee fixed annuity (MYG) is more commonly known as a “CD-type” annuity. Its characteristics can be reasonably compared to those of CDs.

So how do MYGs and bank CDs stack up against each other? To start, let’s acknowledge the conventional wisdom holding that MYGs are generally the better choice because they offer higher rates and certain tax advantages. But is that the final verdict?

Let’s use an example that, to simplify things, assumes the CD is held to maturity and the MYG through its surrender period.

A $250,000 five-year surrender-period MYG annuity offered by Symetra Life Insurance Co. currently has a yield-to-surrender of 2.40% (as of March 21), according to . A five-year CD at GE Capital Retail Bank currently returns 2.25%.

Taxes? As an annuity, the MYG is tax deferred. But it’s worth noting that the CD can also be tax deferred if it’s in an IRA or 401(k).

If both were cashed out after five years, the CD (which is taxed yearly outside of a tax-deferred account) would be worth $270,915, and the MYG (taxed upon withdrawal) would be worth a little more, $272,662. An investor would need to decide if the 8% difference in earnings, over five years, is material.

For this example, my conclusion is that most people should opt for the CD. Everything but the slightly lower rate is comparable, and the rate difference doesn’t outweigh the overall features of CDs, one of which is familiarity with the product. CDs are just easier. People understand them, and a person is not likely to somehow, through persuasion or accident, wind up in an annuity that isn’t so CD-like.

Annuities, largely because of the complexity of their varieties (variable, immediate, 10-year certain, fixed index with income guarantee, and on and on), overwhelm most people. And older investors, who are the prime market for annuities, sometimes end up buying them because of aggressive sales pitches and a desire to, well, do something with their money. And if they don’t buy them, it may be because, as annuities, they have a less-than-stellar reputation in some quarters owing to the zealous way in which they’re marketed.

I would suggest buying what you understand. Sleeping well at night may be worth $1,747 over five years.

Apart from the specific conditions set forth in the foregoing example, here are a couple of matters worth addressing:


CDs are FDIC insured up to $250,000. That limit includes all of an investor’s deposits and accumulated earnings held in any individual bank. But annuities are guaranteed on the state level, in amounts ranging from $100,000 to $500,000. The “insurance” matter is therefore a push.

Early withdrawal

Most people who buy annuities are older than 59-and-a-half. But all age groups buy CDs, so for purposes of comparing MYGs to CDs it’s appropriate to address the IRS’s 10% penalty on early withdrawals from MYGs for people who are younger than 59-and-a-half. There are no such tax penalties imposed on early withdrawals from CDs. For such youngsters, CDs have the advantage.

Of course, most CDs have the standard “substantial penalty for early withdrawal.” But a counterpart applies to MYGs — they have surrender charges. So that’s another push.

Photo Credit: 401(K) 2013

DISCLAIMER: The information in this material is not intended to be personalized financial advice and should not be solely relied on for making financial decisions. Past performance is no guarantee of future results.