CD-Type Fixed Annuity

A CD-type fixed annuity is a personal financial planning tool used to save or invest money. These fall in to the category of deferred annuities, meaning that they are designed to grow and earn interest. These work very much like a CD from a bank in that you earn a fixed interest rate for a certain period of time.

Benefits of CD-Type Annuities

Safety and security. There are a lot of reasons why investors would buy a CD-type fixed annuity, the first and foremost being safety and security. With this type of annuity you know that you’re always going to wake up in the morning worth more money than you were worth the day before. You put your risk money in the market, and you put your safe money that you can’t afford to lose into a vehicle like this.

Multi-year guarantees. This type of annuity offer guaranteed fixed rates of return for various maturities. Some of them will pay the same rate each year until it matures, and others will pay a different rate in different years. Either way, you’ll know up front exactly what you’re going to make. This is another feature that many people like about a CD-type annuity. For example, a 5 year annuity like this may pay 5% interest the first year, then 4% per year for the remainder of the time. This would average out to an annual rate of 4.2% per year. The rate is guaranteed not to change even if current interest rates go down. With this type of annuity, you know exactly what you’re going to earn and when you’ll earn it.

Tax-Deferral. This is a benefit of all kinds of annuities, but it especially helps when dealing with fixed rate annuities. When comparing returns to that of a CD, which pay you taxable interest each year, annuities offer a big advantage. If you’re earning 4% on a CD, and 4% on a fixed annuity, you’ll have more money in your annuity at the end of each year because you don’t have to pay the taxes right away. Of course, once you eventually take the money out of the annuity you’ll get taxed on the interest. But this means that you’ll have more money earning interest in the annuity, which will help it compound faster. See the following chart for an illustration of this.

Are there any downsides to a CD-type Fixed Annuity?

As with any investment, there are pros and cons. A fixed annuity such as this requires that you leave the money ivested for a certain period of time (much like a bank CD). If you try to take out more than the allowed amount in any given year