Annuities vs CDs

The Basics

Both CDs (certificates of deposit) and annuities are considered conservative financial products that can provide income and protect your principal. But they work very differently and serve different purposes in retirement planning.

Side-by-Side Comparison

Feature	CDs	Annuities
Issued By	Banks	Insurance companies
Insurance	FDIC (up to $250k)	State guarantee funds (varies)
Term Length	Typically 3 months to 5 years	Can be lifetime
Liquidity	Early withdrawal penalties, but possible	Limited to none once annuitized
Income Duration	Until CD matures	Can be for life
Longevity Protection	No	Yes
Typical Returns	3-5% currently	Varies by type (4-7%+)

When CDs Make Sense

CDs Are Better For:

Short-term savings: Money you will need in 1-5 years
Emergency funds: You want easy access if needed
Simplicity: No insurance company involvement
FDIC protection: Government-backed insurance (up to limits)

When Annuities Make Sense

Annuities Are Better For:

Lifetime income: Guaranteed payments that last as long as you do
Longevity risk: Protection against outliving your savings
Higher income potential: Often pay more than CDs over time
Tax deferral: Growth can compound without annual taxes

Real-World Scenario

John is 67 with $400,000 in retirement savings. He's comparing two options:

Option 1: CD Ladder

Invest $200,000 in staggered CDs earning 4% average. When each CD matures, withdraw interest and reinvest principal.

Income: About $8,000/year ($667/month)

Must manage renewals every year. Income stops when principal is depleted.

Option 2: Immediate Annuity

Invest $200,000 in an immediate fixed annuity at age 67.

Income: About $13,000/year ($1,083/month) for life

Hands-off. Continues until death, even if he lives to 100+.

The Hybrid Approach

Many financial advisors recommend using both:

CDs for liquidity: Keep 6-12 months of expenses in CDs or savings for emergencies
Annuities for income: Cover your fixed expenses (housing, food, utilities) with guaranteed lifetime income
Investments for growth: Keep remaining funds in diversified investments for growth and legacy

Key Considerations

CDs are FDIC insured; annuities are backed by insurance companies and state guarantee funds
Annuities can provide higher income but with less liquidity
Neither protects against inflation unless you choose inflation-adjusted options
Consider your age, health, and income needs when choosing