Retire Safe & Tax Free - Marc My Words... Annuities Vs. CDs


How Much of Your Nest Egg Would You Like Guaranteed?

Surprise: The Answer is Always 100%

You may have heard me ask this question during one of our Workshops or Focus Groups, "How much of your nest egg would you like guaranteed?" The answer almost always is "100%".

Annuities offer very strong guarantees. The reason why some clients don't have at least some of their nest egg in annuities is because they think that annuities have high costs, low liquidity, low earnings potential, etc.... We need to help them become more educated on the costs, liquidity, earnings potential, lifetime income, etc... of our annuity products because: Annuities make your life better.

Let's take a look at the earnings potential, since I think this may be one of the main reasons why clients may not be looking to annuities. I've been talking about Opportunity Cost with clients and how the crediting potential of annuities compares to other options like CD's. While it is true that products like Fixed Indexed Annuities may be capped on the maximum you may receive in crediting, you need to remember that annuities should not be compared to equities, yet have reported significant gains and no downside risk from sudden and unexpected downturns in the stock markets since their introduction in 1996. These products are a great safe money alternative. What do you normally consider as a safe money vehicle? When you compare the crediting potential of the annuity to those other safe money vehicles, you can see there really is either no opportunity costs or very little opportunity cost.

Do you think that with no opportunity cost or very little opportunity cost and stronger guarantees, that clients may prefer an annuity over other alternatives? I do...

Comparing Tax-deferred Annuities vs Certificates of Deposit (CDs)

Which product is the right choice? In different situations both can be the right choice. When it comes to your needs, it is important to determine whether you need ready access to your money for short-term goals or need to put funds away for longer-term goals. Safe money is the money you don't want to take the chance of losing. Both annuities and CDs are great safe money places for your nest egg dollars.

When it comes to which one is better, the answer depends on your individual financial situation and your goals and objectives.

CDs are generally considered short-term vehicles and are used for such goals as saving money for a new car or a down payment on a house. CDs work well for these goals due to their short time periods. Annuities are typically chosen with the intention of holding the contracts for longer periods of time.

They are generally used to help save for retirement or protect money that has already been accumulated for long-term goals. Although annuities are considered long-term vehicles they can provide liquidity as needed.

While the length of the duration period is a key factor, it's easy to see the biggest difference between the two products comes down to taxation. Earnings on CDs are taxed annually. With an annuity, interest earnings are not taxed until withdrawn. Unless the CD is held in a qualified account (such as an IRA), interest earnings in a CD are reported annually and income tax must be paid on the earnings each year, even if funds are not withdrawn from the account. Interest earnings in an annuity are taxed during the year they are withdrawn and subject to your income tax rate at that time.

It may seem like a simple point, but the difference between a tax- deferred product and a taxable product can be considerable. Money can grow faster in a tax-deferred product like an annuity because interest compounds on top of the money ordinarily paid in current income taxes.

A tax-deferred product may outperform a taxable one because there are three components at work:

  • The premiums earn interest
  • the earnings on the premiums earn interest
  • And most importantly, the money you are not paying in current taxes earns interest.

Are annuities right for you?

  • Do you have longer-term goals for this money?
  • Will tax-deferred products make a difference in your portfolio?
  • Are you concerned with outliving your retirement income?

If you answered "yes" to any of these questions, an annuity may be a possible choice. Annuities are long-term insurance products that provide the advantages of tax deferral and give the option to provide an income that you can't outlive.

Marc H. Weiss, Archer Weiss Insurance & Financial Services, Inc. Please Call Toll free: 1-800-831-2901 or (818) 610-8560