Are annuities better than CDs when planning for retirement?

The retirement planning landscape has shifted dramatically over the past decade. With traditional pensions becoming increasingly rare and Social Security facing long-term funding challenges, Americans are shouldering more responsibility for their golden years than before. This has led many, especially those who are approaching retirement age, to search for reliable, low-risk ways to preserve their hard-earned retirement savings while generating steady income.

And, two financial products that consistently emerge during these searches are certificates of deposit (CDs) and annuities. Both options promise safety and predictability, which are qualities that tend to become increasingly attractive as retirement approaches. Yet despite their shared reputation for stability, these instruments work in fundamentally different ways and serve distinct purposes in a well-rounded retirement strategy.

So, which option — CDs or annuities — is better when planning for retirement? The answer might surprise you, and it’s probably more nuanced than you think.

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Are annuities better than CDs when planning for retirement?

Unlike many other retirement planning tools, the choice between CDs and annuities isn’t simply about which offers better returns. That’s because neither annuities nor CDs are universally “better” for retirement planning. Each option serves different needs, making the comparison less about superiority and more about suitability. 

CDs, in particular, excel in terms of simplicity and predictability. When you open a CD, you’re essentially lending money to a bank for a predetermined period, earning a fixed interest rate in return. Your principal is protected by FDIC insurance up to $250,000, making CDs among the safest investments available. They’re particularly appealing for short-term goals or as a conservative anchor in a diversified portfolio.

However, CDs face significant limitations when it comes to retirement planning. The returns on these interest-bearing accounts typically struggle to keep pace with inflation over long periods, potentially eroding your purchasing power over time. And, CDs don’t provide the lifetime income guarantee that many retirees desperately need. They simply return your principal plus interest when they mature.

Annuities, on the other hand, are specifically designed to address retirement income concerns. For example, an immediate annuity can convert a lump sum into guaranteed monthly payments for life, eliminating the risk of outliving your money, which many retirees are concerned about. Variable and indexed annuities offer the potential for growth while providing some downside protection, though they tend to be more complex and have more fees than a CD account. 

The annuity advantage becomes most apparent, though, when considering longevity risk. If you’re healthy and expect to live well into your 80s or 90s, the lifetime income that’s guaranteed with an annuity becomes increasingly valuable. And, because insurance companies pool longevity risk across many annuity holders, it allows them to offer higher periodic payments than you could get with nearly any other safe investing approach, including CD laddering.

Annuities aren’t without drawbacks, however. They are still complex financial products with varying fee structures, surrender charges and terms that can be difficult to understand. Annuities also typically come with limited liquidity, as accessing your money early often triggers substantial penalties. And, while some annuities offer inflation protection, many fixed annuities do not, meaning the payments you receive could lose purchasing power over time.

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How to choose between annuities and CDs for retirement

The choice between CDs and annuities should align with your specific retirement needs and circumstances. For example, you may want to consider CDs if you prioritize maximum safety and flexibility. If you’re within five years of retirement and want to protect your savings from market volatility, CDs can provide peace of mind. 

CDs can also work particularly well for retirees who have multiple income sources and don’t need to maximize the returns on every dollar. If you have a pension, substantial Social Security benefits or significant assets in other investments, CDs can serve as a stable foundation without the complexity of annuities.

Annuities are often a better fit when guaranteed lifetime income is your primary concern. If you’re worried about outliving your money, don’t have a pension or need to maximize income from a limited nest egg, an immediate annuity deserves consideration. Annuities also make sense if you’re in good health and expect longevity. The longer you live, the better the deal becomes.

Consider your overall portfolio composition as well. If most of your retirement savings are in market-based investments like 401(k) accounts, adding an annuity can provide valuable diversification and guaranteed income. Conversely, if you already have substantial guaranteed income from pensions and Social Security, CDs might offer sufficient safety without the complexity of annuities.

The bottom line

When planning for retirement, the choice between annuities and CDs ultimately comes down to what you need your money to do. If you want lifetime income and protection from outliving your savings, annuities can be a powerful tool. If you’re more focused on preserving principal and staying flexible in the short term, CDs might fit the bill.

But many retirees find that a combination of both — using CDs for short-term safety and annuities for long-term income — offers the best of both worlds. Either way, understanding how each option works (and where it fits into your bigger retirement picture) is a crucial part of making the right choice for your future.