{"id":5892,"date":"2020-12-07T13:28:00","date_gmt":"2020-12-07T13:28:00","guid":{"rendered":"https:\/\/staging.annuityfyi.com\/?page_id=5892"},"modified":"2023-05-22T10:50:11","modified_gmt":"2023-05-22T10:50:11","slug":"cd-alternatives","status":"publish","type":"page","link":"https:\/\/staging.annuityfyi.com\/fixed-annuities\/cd-alternatives\/","title":{"rendered":"Hands Down, Select Annuities Today Are Better Than CDs"},"content":{"rendered":"
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If you invest, say, $100,000 in a three-year MYGA today, and take no withdrawals along the way, you walk away with more than $107,000\u2026 in a five-year MYGA, you walk away with more than $116,000.<\/em><\/strong><\/p>\n\n\n\n

Most of the time, folks weighing the purchase of an annuity ask all kinds of questions. Which type of annuity is best for me and why? What maturity best fits my needs? If I want to dabble in the stock market, should I go \u201call in\u201d with a variable annuity or hedge my risk with a fixed indexed annuity?<\/p>\n\n\n\n

These days, though, the annuity landscape is markedly different. The majority of people shopping for an annuity overwhelming have just one question: How can I get a half-way decent rate of return?<\/p>\n\n\n\n

\u201cToday, a majority of prospective customers tell me that their bank CD is coming due, while new CDs are paying next to nothing, and ask me what they can do about it.\u201d<\/p>\n\n\n\n

Why Investors Prefer Annuities over CDs<\/strong><\/h4>\n\n\n\n

In today\u2019s highly unusual financial world \u2013 one in which interest rates are rock-bottom and highly likely to stay that way for at least a couple more years \u2013 the answer for most folks is very simple: Buy a plain vanilla fixed annuity (specifically, a Multi-Year Guaranteed Annuity, or MYGA). It\u2019s very similar to a bank CD but issued by insurance companies, not banks, and pays markedly more.<\/p>\n\n\n\n

To a lesser extent, fixed indexed annuities (FIAs) are also attracting attention because they offer stock market exposure and protect against losses. (Annuity FYI will also address them.) But MYGAs, by far, are where the action is today. They have much shorter maturities, pay interest annually, and are super simple to understand.<\/p>\n\n\n\n

Banks Can\u2019t Touch MYGA Rates<\/strong><\/h4>\n\n\n\n

Most important, MYGAs pay markedly more than bank CDs. A three-year MYGA is paying up to 2.4% and a five-year MYGA up to 3.10%. By contrast, most bank CDs are paying only about 0.75% and five-year CDs only about 1%. The most generous CD on the market \u2013 a five-year product \u2013 pays only 1.35%.<\/p>\n\n\n\n

When you look at interest rates, it\u2019s best to compare them with the inflation rate. This tells you if you\u2019re coming out ahead after taking rising prices into account. To do so, the interest rate has to be higher than the inflation rate. This isn\u2019t the case with most CDs. According to the U.S. Department of Labor, the annual inflation rate in the U.S. was 1.2% for the 12 months ending in October.<\/p>\n\n\n\n

If you invest, say, $100,000 in a three-year MYGA today and take no withdrawals along the way, you walk away with more than $107,000. If you invest that money instead in a five-year MYGA, you walk away with more than $116,000. Most annuity buyers prefer the three-year MYGA because they don\u2019t want to tie up their money any longer than necessary.<\/p>\n\n\n\n

FIAs Require Patience \u2013 But It\u2019s Worth It<\/strong><\/h4>\n\n\n\n

FIAs with the most growth potential are sold without a guaranteed lifetime income rider, which costs roughly 1% a year and so detracts from potential market returns. As mentioned, FIA owners are protected from market losses. In return, they receive only a portion of the increase in the underlying stock market index in a positive year, and these portions have been decreasing. Most prospective FIA buyers still have no problem with the trade-off. What is frequently an issue, however, is that most FIAS have 10-year maturities. Many people don\u2019t want to lock up their money that long.<\/p>\n\n\n\n

The Most Attractive Annuity Route of All: Laddering<\/strong><\/h4>\n\n\n\n

What is probably best for most investors, assuming they have the funds to do so, is to hedge their income prospects through so-called laddering. This means they invest in different annuities with different maturities, recognizing that it\u2019s impossible to know what interest rates will do as this decade proceeds and so it\u2019s best to buy annuities that mature at different points in time. At these points, you\u2019re likely to buy new annuities that hopefully pay higher rates than available today.<\/p>\n\n\n\n

FIAs belong in an annuity ladder, most annuity pros say, notwithstanding their long maturities. For one thing, FIAs with shorter maturities, typically five or seven years, are available. Most important, FIAs without income riders typically invest in low-volatility indexes with high index participation rates and typically return an average annual return of 3.5% to 6% over time \u2013 more than MYGAs.<\/p>\n\n\n\n

If all or most of this seems attractive, here are a few MYGAs and FIAs that stand out. All allow 10% penalty-free withdrawals starting at least by the second year. All FIAS cited are growth (no guaranteed income) FIAs.<\/p>\n\n\n\n

A Look at Top MYGAs<\/strong><\/h4>\n\n\n\n