Quick summary: CDs are savings products from banks. They are good for keeping your money safe for a set time with a guaranteed, but often small, return. Guaranteed income contracts are from insurance companies. They are made to give you a stream of income for a set time or for life, focusing on income that lasts a long time instead of easy access to your cash.

For decades, the Certificate of Deposit (CD) has been a key part of safe retirement planning. It’s easy to see why: your starting money is safe, you know what you’ll earn, and your funds are protected by government insurance. The Federal Deposit Insurance Corporation provides coverage up to $250,000 per depositor, per insured bank, for each account ownership category. This creates a powerful sense of security.

But that security comes with a problem today: interest rates may not grow as fast as your living expenses. As of April 2024, the national average rate on a five-year CD was just 1.35%, according to the Federal Deposit Insurance Corporation. At the same time, retirees often face their own rising costs. The US Bureau of Labor Statistics found that a special measure of costs for older Americans (the CPI-E) has historically been about 0.2 percentage points higher per year than the main inflation number, mostly because of higher healthcare spending.

This gap between low-risk returns and rising expenses leads to a tough question: how do you get steady income without your money losing its value? A detailed comparison of annuities vs cds for retirees is no longer just a question for experts, it’s something you need to do.

What are the real risks of each product?

The main risk for CDs is that rising prices will make your money buy less. The main risks for guaranteed income contracts are the difficulty in getting your money out and the financial strength of the insurance company.

Your money in a CD is safe, but the return might not be enough. The main risk is that prices will rise faster than your interest grows. This means your money buys less over time. For retirees, this risk is especially serious.

 The US The Bureau of Labor Statistics created a price index for older Americans that, on average, ran 0.2 percentage points higher per year than the standard consumer price index. Your account balance grows, but it can’t buy as much. Instead of federal insurance, these contracts are backed up by state groups called State Guaranty Associations. These groups give you a layer of protection if an insurance company fails, but the coverage limits are different in each state.

What key questions should you ask before committing?

When you look at these products, focus on the company’s strength, how clear the contract is, and your own timeline. Don’t just look at the advertised interest rate.

For a Certificate of Deposit, checking it out is fairly simple. Since your original deposit is protected by the Federal Deposit Insurance Corporation up to the legal limit, the main choice is about locking in a rate for a certain time. 

• Check the insurer’s financial strength: The contract’s promise of future income is only as good as the company behind it. Ask for the insurer’s ratings from independent agencies like AM. 
• Understand the state guaranty association: These contracts are not FDIC-insured. Instead, they are protected by state-level guarantee associations, which help if an insurer fails. The National Association of Insurance Commissioners has information on how these state systems work. You should ask,
• Check the surrender charge schedule carefully: Most of these contracts have a surrender period, usually from three to ten years. During this time, taking out more than a certain amount will cost you a penalty. This penalty gets smaller over time. Ask for the full surrender charge schedule in writing.

This table shows the main differences in how you should look at these two financial tools.

How do CDs and guaranteed income contracts work?

A CD earns you money from a bank’s loans. A fixed income contract earns you money from an insurance company’s large portfolio of bonds.

How a Certificate of Deposit works is simple. When you put money into a CD, the bank combines your funds with others. It then uses this money to give out loans, like mortgages and car loans, at a higher interest rate than it pays you. The bank makes a profit on the difference between what it earns on loans and what it pays you. 

A fixed income contract works in a different way. When you pay for a fixed income contract, your money goes into the insurance company’s “general account”. This is a very large, safely managed collection of investments, often worth billions of dollars. The insurance company’s investment team manages this portfolio to be stable and provide a predictable return over the long term.

Here’s the main difference: a CD’s return is based on a bank’s ability to manage its loans for a short or medium term. You are using two completely different financial systems.

Annuity Advantage is a marketing organisation and independent insurance agency. It provides educational resources and connects consumers with financial professionals. Further information can be found at AnnuityAdvantage.