With savings account rates at historic lows, many retirees and other savers are uncertain where to go to stretch their dollars, while keeping their assets as safe as possible. Options include certificates of deposit (CDs), money market accounts, U.S. Treasury securities and fixed-deferred annuities.
How do they compare? Here's an overview:
Certificates of deposits (CDs): Issued primarily by banks, a certificate of deposit (CD) is a savings vehicle with a fixed maturity date and a fixed interest rate that is insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per CD holder. CDs are typically used for short- to medium-term savings needs. They typically offer a higher investment return than traditional savings accounts, but lower rates of return than fixed-deferred annuities.1
Money market accounts: A money market account usually combines the flexibility of a traditional savings account with a higher interest rate and the ability to write a limited number of checks. Money market accounts seek to maintain a stable $1 unit value and because of their stability are often used as “parking places” for liquid assets. These accounts also are backed by the FDIC, and typically require a larger minimum balance than a savings account.2
Treasury securities: Treasury securities are essentially loans to the federal government, and come in three forms. T-Bills offer the shortest terms—four, 13, 26, and 52 weeks. T-Notes occupy the middle, maturing in two, three, five, seven, or 10 years, while T-Bonds, known as "long bonds," offer a 30-year maturity date and will pay interest on a semiannual basis. Treasury securities rank among the safest investments, because they have the backing of the "full faith and credit" of the U.S. government as to the timely payment of interest and principal. However, they are subject to inflation and their values fluctuate in response to changes in interest rates.3
Fixed-deferred annuities: A fixed-deferred annuity offers some of the benefits of a CD, including the ability to generate interest safely, while also giving the holder the ability to delay the payment of income taxes on money earned on the annuity. Their aim is to return your principal investment to you with interest. Fixed-deferred annuities are typically used for long-term funding needs related to retirement. However, access to the funds in an annuity is limited, and fixed-deferred annuities involve insurance-related fees and charges. They are issued by insurance companies and are not backed by the FDIC. Therefore, the financial stability of the issuing insurance company is key. You can evaluate the financial strength of an insurance company by checking its ratings by independent sources, which include Moody's, A.M. Best, Standard & Poor's, and Fitch.4
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1Tony Armstrong, “What is a CD (Certificate of Deposit),” Nerdwallet, February 24, 2017, https://www.nerdwallet.com/blog/banking/cd-certificate-of-deposit/
2“Money Market Account,” Investopedia, http://www.investopedia.com/terms/m/moneymarketaccount.asp
3Mark P. Cussen, “Introduction to Treasury Securities,” Investopedia, http://www.investopedia.com/articles/investing/073113/introduction-treasury-securities.asp
4 “Buyer’s Guide to Fixed Deferred Annuities,” National Association of Insurance Commissioners, 2007, http://www.naic.org/documents/prod_serv_consumer_anb_lp.pdf
This educational third-party article is provided as a courtesy by Deborah L. Lewis, CFP, ChFC, MBA, CPA, Agent, New York Life Insurance Company. To learn more about the information or topics discussed, please contact Deborah Lewis at 703-352-9883, DLLewis@FT.NewYorkLife.com.