How do you feel about annuitiies versus CDs?

mathjak107 said:
if one is looking at an spia today which is a life annuity , the will pay a 65 year old 644 a month on a 100k ….that is 7728 a year .

keep in mind it will take you 13 years to just get back the money you handed them . so you have zero return until age 79

but you will be taxed on a phantom amount of interest each year by the irs , even though your return is still zero all those years and have not received a penny on their dime yet you will be taxed on an implied return
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With annuities, aren't they just paying you back the lump sum of money you gave them plus a small amount of interest? I didn't know about the IRS taxing you on the interest you haven't received yet. That alone completely turns me off annuities.
 

Candi1 said:
With annuities, aren't they just paying you back the lump sum of money you gave them plus a small amount of interest? I didn't know about the IRS taxing you on the interest you haven't received yet. That alone completely turns me off annuities.
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depends on the type of an annuity .

a single premium immediate annuity gets interest and mortality credits as those who die pay for those who live .

but the irs doesn’t wait until you get back the money you handed them to start taxing you .

rather they imply a certain interest rate to what really is still your own money , and tax you on it each year .

they look at what you get as principal and interest .

in reality though you don’t see a penny of their money until 14 years later
 
mathjak107 said:
depends on the type of an annuity .

a single premium immediate annuity gets interest and mortality credits as those who die pay for those who live .

but the irs doesn’t wait until you get back the money you handed them to start taxing you .

rather they imply a certain interest rate to what really is still your own money , and tax you on it each year .

they look at what you get as principal and interest .

in reality though you don’t see a penny of their money until 14 years later
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Thank you, Mathjak107. You've educated me about annuities. An immediate annuity is what I would have signed up for; now I am definitely staying away from them. Again, as you pointed out, the money I would get each month would just have been my own money being returned to me. I wouldn't actually see any interest on that money until 14 years later, at which time I'd probably be dead. I'd much rather hold onto my money and just invest it in relatively short-term CDS where I know I will get the money back, plus interest, when the CD matures.
 

Candi1 said:
Thank you, Mathjak107. You've educated me about annuities. An immediate annuity is what I would have signed up for; now I am definitely staying away from them. Again, as you pointed out, the money I would get each month would just have been my own money being returned to me. I wouldn't actually see any interest on that money until 14 years later, at which time I'd probably be dead. I'd much rather hold onto my money and just invest it in relatively short-term CDS where I know I will get the money back, plus interest, when the CD matures.
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annuities can be very hard to understand
 
mathjak107 said:
annuities can be very hard to understand
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You understand annuities so you must be a very smart man. I like the idea of liquidity and being able to have money in hand in case of emergencies; I don't want it locked up in an annuity. My husband and my tax preparer both had a very deep aversion to annuities and now I understand why.
 
Candi1 said:
You understand annuities so you must be a very smart man. I like the idea of liquidity and being able to have money in hand in case of emergencies; I don't want it locked up in an annuity. My husband and my tax preparer both had a very deep aversion to annuities and now I understand why. I also did not like and was suspicious of the very hard sell tactics of my personal banker who kept trying to get me to buy an annuity.
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annuities can add a benefit when a portion of the bond budget in a diversified portfolio is allocated to them .

they should only be a piece of the fixed income side of a balanced portfolio.

i would never use one as my retirement investment
 
Right now, my CD is paying me 5% interest and I believe the current inflation rate is 3.3%. When my CD matures, I might roll it over if the interest rate is favorable. With annuities, as I understand it, you are locked into an interest rate for the life of the annuity which might not keep up with inflation. You can buy an annuity with inflation protection but that is more expensive and reduces your monthly income from said annuity substantially.
 
Candi1 said:
Right now, my CD is paying me 5% interest and I believe the current inflation rate is 3.3%. When my CD matures, I might roll it over if the interest rate is favorable. With annuities, as I understand it, you are locked into an interest rate for the life of the annuity which might not keep up with inflation. You can buy an annuity with inflation protection but that is more expensive and reduces your monthly income from said annuity substantially.
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annuities are usually a fixed payout for life .

the draw rate usually you get is higher initially then you could safely draw from yourself , but over time the fact that itbisnt growing with inflation has it lagging eventually.

inflation adjusted annuities cost way to much in my opinion to be useful vs just investing on your own
 
mathjak107 said:
annuities are usually a fixed payout for life .

the draw rate usually you get is higher initially then you could safely draw from yourself , but over time the fact that itbisnt growing with inflation has it lagging eventually.

inflation adjusted annuities cost way to much in my opinion to be useful vs just investing on your own
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Your replies, as well as that of others in this forum, have helped solidify my sticking with CDs. I am too conservative to risk other types of investments. I don't want to risk any of my savings this late in the game. Thank you all for contributing your opinions. It is very much appreciated. Thank you.
 
Candi1 said:
Your replies, as well as that of others in this forum, have helped solidify my sticking with CDs. I am too conservative to risk other types of investments. I don't want to risk any of my savings this late in the game. Thank you all for contributing your opinions. It is very much appreciated. Thank you.
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I see nothing wrong with a fixed rate guaranteed return annuity as a conservative investment. Sure you'll leave your money parked for five years or so, but right now you can get over 5%, which isn't terrible.
 
C50 said:
I see nothing wrong with a fixed rate guaranteed return annuity as a conservative investment. Sure you'll leave your money parked for five years or so, but right now you can get over 5%, which isn't terrible.
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fixed income annuities are not investments ..they are insurance..

the five year deals in annuities are really cds from an insurance company , they are not actually the life annuities being discussed .

those you do not get your money back unless you add an expensive life insurance rider to them
 
Candi1 said:
I'd much rather hold onto my money and just invest it in relatively short-term CDS where I know I will get the money back, plus interest, when the CD matures.
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Don’t be too short term in the event the Fed decides it’s finally time to start lowering interest rates. The bankers will drop rates like a hot potato. You might consider a ladder from one to five years. Lock in some of those rates at or near 5. By the time you know rates will be going down and staying down, it’s too late. If rates continue to say the same you can reinvest as the shorter term CDs mature. If rates drop you can brag to your friends about your 5 year 4.6% CDs in a 3% world. Consider this. Who knows where rates will be in a year or two? I don’t.
 
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Re: OP, Annuities vs CDs
CD's are bank's short to medium term savings. Very low risk in losing "the money".
The comparable insurance industry's product is a MYGA (multi-year-guaranteed-annuity) short to medium term contracts. Very low risk in losing the money.

We have credit unions' CD's time laddered with the longest duration of 17 months. We have brokered bank CD's optimized for yield but less than 18 months.
We have a 3yr MYGA (previously a variable life annuity) with 2 years remaining,
We also have Schwab's high yield MM (SWVXX).
The CD's, SWVXX are currently yielding a little more than 5%. The MYGA has a 4.85% yield.
I expect that SWVXX will have a rapid rate decrease next week. The CD's will probably be renewed below 4% beginning September. So the past 12 months, the MYGA had a rate disadvantage of ~0.25%; The next 24 months the MYGA will probably have a rate advantage of 0.25% to perhaps 1.0%.

CD's and MYGA should Not be compared to investment mutual funds or stocks, bonds.
 
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Like so many things, it depends.

It can depend on what the economy is doing at the time the annuity is purchased, the type of annuity, your age, your other investments, your relationship with money, etc…

The only time I seriously considered an annuity was when I separated from my employer funded pension plan, lump sum or annuity.

I chose lump sum and so far I’m more than pleased with my decision and the returns on the investment.

I have family and friends that I would encourage to choose the annuity because the temptation would be too great to spend a lump sum.
 
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Candi1 said:
Although my banker keeps pressuring me into buying an annuity, I feel more comfortable with CDs. My late husband and my tax adviser both disliked annuities for various reasons, including complexity and expense. I don't like the idea of paying out a large sum of money to an insurance company in return for getting a fixed sum of money each month (which would be taxable), That fixed sum of money each month would also not necessarily keep up with inflation. OK, I'm getting a lower interest rates with CDS but I think the advantages of a CD outweigh the potential disadvantages of an annuity. How do you feel about annuities versus CDs?
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Do you know why he wants you to switch? Like, does he have some inside information that interest rates will drop in the future, or the stock market will have a long-term slide? Or does he just get a nice fee for every annuity he sells?
 
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C50 said:
Sure you can. Some CDs are callable, typically higher rate/longer term CDs. If the interest rates start dropping the lending institution says the term is over, even if it hasn't matured, too bad for you, come back tomorrow and buy a new CD at a lower rate.

Not that I'm up on a soapbox supporting annuities, just pointing out an issue with CDs many overlook.
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What I have learned in life is that any investment can go wrong.

Peope were “investing” in NFTs not long ago and when I was young, some bizarre bull-loney in the news said some were investing in Beanie Babies.

The power of the mass media at work. Be careful about listening to it.
 
leastlongprime said:
Re: OP, Annuities vs CDs
CD's are bank's short to medium term savings. Very low risk in losing "the money".
The comparable insurance industry's product is a MYGA (multi-year-guaranteed-annuity) short to medium term contracts. Very low risk in losing the money.

We have credit unions' CD's time laddered with the longest duration of 17 months. We have brokered bank CD's optimized for yield but less than 18 months.
We have a 3yr MYGA (previously a variable life annuity) with 2 years remaining,
We also have Schwab's high yield MM (SWVXX).
The CD's, SWVXX are currently yielding a little more than 5%. The MYGA has a 4.85% yield.
I expect that SWVXX will have a rapid rate decrease next week. The CD's will probably be renewed below 4% beginning September. So the past 12 months, the MYGA had a rate disadvantage of ~0.25%; The next 24 months the MYGA will probably have a rate advantage of 0.25% to perhaps 1.0%.

CD's and MYGA should Not be compared to investment mutual funds or stocks, bonds.
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As a marker, SWVXX as of 08/02/2024, the 7 day yield was 5.14%;
DJI was off today -1033 to 38703;
NASDAQ was off - 576 to 16200
 
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How about so-called "Brokered CDs"? If I understand them correctly, they a bank sells a large denomination CD to a brokerage company (e.g., Fidelity) who parcels chunks to individual investors. I presume the brokerage makes money several ways on this (spread, transaction, other). But somehow they smell fishy relative to just buying a vanilla CD from a bank.
 

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