Annuity vs. CD - To Park Cash

[foghorn]

I am hoping to get some perspective from the very smart people here.

As part of my FU Fund, I have some cash that was part of a CD ladder.  One of the "rungs on the ladder" has matured and I am looking for a place to park it.  Renewing into a new CD (3 years) would yield a lousy .25%.  However, a 3 year Annuity is yielding 1.65%.  This Annuity is being presented to me as simply a better place to park cash.  I know Annuities are often frowned upon - but in this case, seems to be a reasonable option for cash that I will not put into the market and will not need for those three years.

Is there anything I am missing?  Some warning sign that I am not seeing?  Thanks.

[celerystalks]

What kind of annuity ? Single premium immediate annuity ? Variable annuity ? Something else ?

How much money and percentage of your NW are you talking about? Generally, you are probably better off with the CD in this case. Or just leave it as cash in the bank.

[MustacheAndaHalf]

You think a for profit insurance company is giving you free money?

[foghorn]

It is a fixed deferred Annuity.  It would be $100,000.  That amount is less than 10% of my FU fund and about 2.5% of total Net Worth. 

[foghorn]

OP Here.

I still feel like I am missing something here.  It is a Deferred Fixed Annuity.  3 Years at 1.65%. 

I as understand it, it is not really different than a CD.  After 3 years I get my principle back plus the interest.  It simply pays quite a bit more than a 3 year CD. 

I know Annuities are often a dirty word and I have never purchased one before.  However, this type seems to be a better place to park some cash.  Again, please school me if I am missing something.

Thank you.   

[theolympians]

I don't own an annuity, but other posts on here discuss a lot of hidden fees on your money. The discussions note that the seller gets a good commission on your money up front. To make that money back, these posts read that there are more fees to pull your money out early. I would look into that before giving the insurance company your money to get less than 2% return.

My wife and I have had the same discussions about where to park our cash. Money markets, CD's as you noted are paying crap. The annuity doesn't seem much better. The missus and I, are just going to stay in cash for now.

Searching my memory banks I believe there was a time when you could invest in an individual bond that payed 4-5%. I long for those days.....

[MustacheAndaHalf]

Without knowing the contract, I can't dispute anything you say about it.  You say it's like a CD, but banks are offering 3-year CDs at 0.65%.  So if it's just like a CD, why is it paying so much?

Personally, I disagree with taking risks in your bond/cash positions.  The U.S. stock market is up +56% from 3 years ago, which dwarfs any gains you have in a small allocation of cash/bonds/CDs.

Instead of moving 2% of your assets into a questionable annuity product, why not leave 1.8% in cash and move 0.2% into the stock market?

[soccerluvof4]

At this point I would pick some good strong dividend equities and keep a good watch on them. Over 8% in NLY which has proven to survive just about anything, ANGC is nearly 9% and there cash rich (both are reits) VZ though I am not a fan is paying a nice divy and seems to have good support , MMP is nearly 10% and is in the oil space and should be save BUT all of them I would average in regardless. I only suggest this since its a small percentage of your portolio. I have up to 2% in a trading account I do the same. Just do your own homework if you go that route. Otherwise there really isnt much out there for holding cash. But that is just my .02$

[BicycleB]

Like the others, I suspect there are fees or other barriers that make the proposed annuity not "like" a CD.

I suppose it's possible that the odd advantage in short term interest is offered as a loss leader - they're assuming a high enough % of participants retain the annuity that they will make their profit. In any case, it's not like a CD, because in a CD, the interest during the stated medium term period (in this case 3 years) is the reward; in an annuity, usually the expectation is to hold the annuity for many years, then in old age receive a stream of fixed payments. I'm assuming the salesperson is stating there's an early redemption option of some sort at the 3 year mark with a nominal interest rate attached, but that's not the point of the instrument, not the expected use case (regardless of what the salesperson says).

@foghorn, I am struck that CDs and annuities are part of the "cash" bucket. Cash should mean money you can access quickly. Is the annuity money locked up for 3 years? Does the CD have substantial penalties for early withdrawal? If so, then in my view, at best these instruments are more similar to bonds, not cash. Can't you get close to 1.65% with a bond fund, but also have easier lower-cost withdrawal abilities?

VBILX is paying 1.27% at the moment, for example.

Another option, at least for small amounts, is i-bonds (Series I Treasury Bonds). They're paying 1.68% right now, can be cheaply redeemed after one year, and carry federal guarantee of 100% inflation protection for 30 years. I doubt that either the annuity or the CD is as good as that! Though you can only buy $10,000 per year. https://www.treasurydirect.gov/indiv/products/prod_ibonds_glance.htm

Depending on your energy and level of organizational detail, you could use some the CD/annuity cash to harvest bank bonuses. Those can be equivalent to much higher interest rates for periods between 3 months and 3 years. There's a thread somewhere about that.