Even with the markets continuing to set records, there’s still consumer demand for fixed-rate guarantees with principal protection.
Most retirees and baby boomers are looking for contractual guarantees and benefits, which has given rise to over $200 billion in annual annuity sales. Unfortunately, too many of those policies are poorly explained variable or indexed annuities packed with riders, fees, and complex accumulation strategies. Variable and indexed annuities do have their place, but aren't the too good to be true or one size fits all.
At the end of the day, the vast majority of investors still yearn for a CD-type guaranteed rate of return that fully protects their money called a Multi-Year Annuity or MYGA. They want no moving parts, and a simple to understand structure where they know the contractual guaranteed percentage return. To the sophisticated investor, these fixed strategies seem boring, but to the CD buyers of the world, the high interest rates of the past continues to propel the search for a reasonable fixed return.
Fixed-rate annuities and certificates of deposit still have their place in a portfolio, and it's important to know their similarities and differences before locking in a specific guaranteed rate.
Guaranteed annual rate
Both CD's and fixed-rate annuities offer a guaranteed annual interest rate growth for a specified period. For example, a five-year CD in today's environment might offer a 2% annual guarantee each year for five consecutive years. The obvious risk of locking in any rate with either a CD or fixed-rate annuity is the possibility of being locked in when rates are moving up.
Fixed annuity rates are typically higher
You will find that fixed-rate annuities usually offer a higher annual yield than their CD counterparts. For example, a current five-year fixed-rate annuity will have a higher contractual yield than a five-year CD. Right now you can get 2.85% on a five year fixed annuity, 3.05% on a six year and 3.30% on a seven year. That doesn't mean that you should choose one over the other, because there are other key points to consider. However, it's good to know that if your bank is showing you a CD, there's a good possibility that the same term fixed-rate annuity could be a better return alternative.