This is a 2.5 minute read.
by Debra May
Retirees often face a dilemma when deciding how to invest their money in a more risk-averse manner. Certificates of Deposit (CDs) are popular, but Fixed Index Annuities (FIAs) are sometimes a much better option.
I want to compare these two safe money choices to show why I believe FIAs are better for retirees. Let’s start with the stalwart safe money option, certificates of deposit. CDs are highly regarded as safe investments because they are insured by the FDIC up to $250,000 and offer guaranteed returns. However, the returns on CDs are typically relatively low and may not keep up with inflation. Lower returns mean that although your principal investment may be safe, the purchasing power of that money is slowly eroding.
FIAs, on the other hand, are insurance products that offer potentially higher returns than CDs. A FIAs guarantee means, at the very least, your principal is protected. A fixed-index annuity’s returns are linked to stock market indexes such as the S&P 500. This link means that if the stock market goes up, so do the returns on your FIA investment. However, if the stock market goes down, you have downside protection. FIA contracts limit returns to a predetermined maximum or a 0% return, ensuring the safety of your principal. Multiple studies comparing FIAs to certificates of deposit indicate that FIAs are generally the better choice for retirees.
Research by J.P. Morgan Asset Management and other financial services companies shows that FIAs have outperformed CDs over the past ten years, with an average return of 3.3% compared to 1.8% for CDs.
Furthermore, contrary to what many believe, FIAs offer greater flexibility and liquidity than a typical CD. Most fixed index annuities allow you to withdraw up to 10% of the principal amount each year without any surrender charges or penalties. This feature can help you pay for unanticipated medical or other expenses.
So, because they offer higher returns, greater flexibility, and protection for the principal amount invested, a fixed index annuity (FIA) can be an attractive alternative to CDs. Annuities also offer other attractive benefits to people who want to create a guaranteed, dependable retirement income stream, provide a legacy for their spouse, guard against outliving savings, or finance long-term care. However, like any financial product,
FIAs also have some disadvantages you must consider before purchasing one. For instance, the performance of an underlying index limits the return on your FIA. There is no guarantee that your return will be higher than what you might get with another kind of asset. Some FIAs may also be expensive and have costly surrender charges if you need to withdraw your money before a specific time. If you need access to your money before the surrender period is over, you may not be able to get it without paying hefty penalties. Finally, although most FIAs allow you to access a certain percentage of your annuity’s value without penalty, they may not offer you as much liquidity as you want.
Debra’s takeaways: If you are considering adding a CD to your retirement portfolio, I encourage you to look at fixed index annuities first. While they aren’t the right choice for everyone, FIAs may be the right choice for those who want a more risk-averse, predictable retirement income stream with growth potential. However, it’s essential to consider both the advantages and disadvantages before making any investment decision. FIAs have some downsides that you must evaluate, and they can be more complicated than other financial tools. For this reason, I recommend any pre-retiree or retiree thinking about annuities partner with a qualified retirement income specialist who thoroughly understands the product.