Author Topic: Fixed annuity vs IRA CD  (Read 190 times)

Catica

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Fixed annuity vs IRA CD
« on: March 16, 2020, 06:30:18 PM »
Hi,

My dad's IRA CD is about to mature and he told me today that the bank called him to make an appointment to come in and discuss what he wants to do with the money and they will tell him CD rates at that time if he decides to put that money in CD again.  I called the bank and it turns out that them made him an appointment with a financial advisor at the same bank to discuss fixed annuity instead.  They told me that it's the same as IRA CD except the money is insured with insurance company and they can offer a better rate than CD.  I think they will screw my dad over (he doesn't understand any of these products, and his English is not good on top of that).  Do you guys have any advice whether he should even bother meeting with this guy? My dad at his age is just trying to preserve his money.  Any ideas what else to do with the money other than IRA CD, or is that a good option?  The CD that is about to mature was 3% interest rate, and I know he won't be able to get that any more.
 
Thank you!

dividendman

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Re: Fixed annuity vs IRA CD
« Reply #1 on: March 16, 2020, 09:55:39 PM »
Dammit, I had a whole reply but then closed my tab!

TL;DR - Don't have the meeting with the bank and do CDs.

Basically this: Annuities are tricky instruments with generally higher fees and may not be FDIC insured.

If you want capital preservation a CD ladder is fine, and you can set one up relatively easily at several online banks like Ally: https://www.ally.com/bank/cd-ladder/ and they are FDIC insured. Yes, the rates will be significantly lower than 3% (12 month CD at ally is 1.75%).

You can also look at short term bond instruments like BSV (Vanguard short term bond fund), but this requires you setting up a Vanguard account or having another brokerage to buy it and then sell it as you need money. It'll pay monthly interest payments at higher rates than CDs (generally), but the price of the principal could fluctuate somewhat.

MustacheAndaHalf

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Re: Fixed annuity vs IRA CD
« Reply #2 on: March 16, 2020, 10:16:26 PM »
You said a CD and annuity are the same... maybe you're confused, but it's also possible they lied to profit off the commission.

With a CD, you deposit money and are paid interest until it's due, then you get your money back.
With an annuity, your initial deposit is gone forever.  They make a bet on your life expectancy, and make payments over time.  Life insurance companies make a lot of money on them, and that money comes from people who buy the products.

It's a really bad time to earn interest, since the Fed just dropped it's rates to 0%.  The return of CDs will likely fall by a similar amount, since the bank can't afford to pay out the old rates.

Catica

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Re: Fixed annuity vs IRA CD
« Reply #3 on: March 17, 2020, 05:30:19 AM »
Dammit, I had a whole reply but then closed my tab!

TL;DR - Don't have the meeting with the bank and do CDs.

Basically this: Annuities are tricky instruments with generally higher fees and may not be FDIC insured.

If you want capital preservation a CD ladder is fine, and you can set one up relatively easily at several online banks like Ally: https://www.ally.com/bank/cd-ladder/ and they are FDIC insured. Yes, the rates will be significantly lower than 3% (12 month CD at ally is 1.75%).

You can also look at short term bond instruments like BSV (Vanguard short term bond fund), but this requires you setting up a Vanguard account or having another brokerage to buy it and then sell it as you need money. It'll pay monthly interest payments at higher rates than CDs (generally), but the price of the principal could fluctuate somewhat.

Thank you for the advice.  I think in my dad's case CD latter may not even be necessary.  He is over 70 so he has to take RMD anyway each year (so he has access to the CD money). On top of that he is still working so he is able to live off of his income.
« Last Edit: March 17, 2020, 05:35:07 AM by Catica »

Catica

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Re: Fixed annuity vs IRA CD
« Reply #4 on: March 17, 2020, 05:34:41 AM »
You said a CD and annuity are the same... maybe you're confused, but it's also possible they lied to profit off the commission.

With a CD, you deposit money and are paid interest until it's due, then you get your money back.
With an annuity, your initial deposit is gone forever.  They make a bet on your life expectancy, and make payments over time.  Life insurance companies make a lot of money on them, and that money comes from people who buy the products.

It's a really bad time to earn interest, since the Fed just dropped it's rates to 0%.  The return of CDs will likely fall by a similar amount, since the bank can't afford to pay out the old rates.

I didn't say that the CD and fixed annuity is the same, the bank said that, which is the reason I posted my message here, to clarify things.  I know what CD is and how it works, that's why I was confused why the bank would say their fixed annuity is the same as CD but offers a better rate.  Now I know it's not the same and I will stick to CD.