Q Dear Rick:
My wife and I are ultra conservative investors. I have read your articles over the years and have attended some of your talks and I like the fact that you are a straight shooter, easy to understand and give simple and concise advice. Our issue deals with a maturing CD. In August we will have a $150,000 CD that matures. Our question is what to do with the money? We have no debt whatsoever. I do not anticipate that I will ever need this money. My wife and I both have pensions that more than cover all our living expenses and when we collect Social Security down the road that will all be extra money. My wife and I absolutely do not want any investments where we have any chance to lose any of the money. We would rather receive a zero percent return than invest in stocks, real estate or anything of that nature. We are considering another 10-year CD or 10-year guaranteed fixed annuity. Could you tell me the pros and cons and which one you’d recommend for me?
A Dear L. K.:
First, congratulations on achieving the American Dream. It appears from your letter you can afford to retire when you want and can enjoy a long and comfortable retirement.
In reviewing your two investment alternatives, the pros of the CD are first, they are federally insured. You obviously are very concerned that the safety of the principal and money in the bank is insured. In addition, I think another benefit of the CD is the flexibility provided. With a CD you can stagger the maturities. For example, you can set some money to mature in three-months, six months, one-year, five-years or whatever. Or, you can choose to put the entire amount in one CD and have that money mature when you choose.
In reviewing fixed annuities, once again, they are insured. The insurance is a little different than the bank’s, but I think most fixed annuity clients can be assured that if for some reason their annuity company went under, their money would be protected. Another benefit of the annuity is that if you do not touch any of the income, it will grow on a tax-deferred basis. With a CD you are going to be taxed on the interest whether it’s paid to you or reinvested. With an annuity, as long as you have the money reinvested, the taxes are deferred. You only pay taxes once you start withdrawing money from the annuity.
The cons of both investments are that the returns are very low. In addition, one of the downsides of a fixed annuity is that there are severe penalties if you cancel the annuity before a set number of years.
All in all, considering where we are with interest rates, I think it would be a mistake to buy a fixed annuity at this point in time. Maybe it would be a better choice in a few years when interest rates are higher, but not now. Therefore, in reviewing your situation I recommend going with the CD. In that regard, I recommend that you shop CDs to be able to get a higher rate of return. As long as the bank you are using is federally insured, you will have no problem. One website you may wish to look at is www.bankrate.com. They have a listing of the highest paying federally-insured CDs in the country. I always recommend that people shop CD rates because you’d be surprised by the difference in rates throughout the country.
With regard to the timeframe of the CD, in today’s low interest rate environment I would be recommending short-term CDs, probably no more than one year. After all, why lock into a long-term rate when interest rates are at record lows? To me, if you wanted a long-term CD, it would make sense to wait at least a year when more likely than not interest rates will be higher.
Rick is a fee-only financial advisor. His website is www.bloomassetmanagement.com. If you would like Rick to respond to your questions, please email Rick at firstname.lastname@example.org