CD Ladder vs Deferred Fixed Annuity

[Marc]

When I met with my Fidelity rep last week, I mentioned that I was looking at starting a CD ladder next year. He said I should look at deferred fixed annuities as a possible replacement for a CD ladder. I know the general dislike of annuities here; however, can someone explain why a deferred fixed annuity might be comparable to a CD ladder?

thanks,

Marc

 

[pb4uski]

The deferred fixed annuities that I am familiar with reset the interest earnings rate annually on the policy anniversary so the interest rate for next year can be higher or lower than what it is this year.... additionally, some have a kicker in the first year to induce you to buy.

With a CD ladder, you know what return you are getting for the terms of the CDs that you are buying. With a deferred fixed annuity, the surrender charge locks you in for a period of time (usually 5-7 years) but the interest rate isn't guaranteed for that whole term... instead it is reset annually subject to a minimum (~2% these days I suspect).

 

[Chuckanut]

He said I should look at deferred fixed annuities as a possible replacement for a CD ladder. I

I am curious. Did he make specific recommendations for the length of the deferred period, and explain how it would contribute overall to your financial plan for retirement?

 

[njhowie]

Maybe you should ask the Fidelity rep his reasons why he says the annuity is better than the CD ladder. If it's simply "comparable", then why do it?

Unless he can make a guarantee that the (after tax) returns from the annuity will be higher than the CD ladder, with no additional risk, I don't think he has a case. I don't believe the rep can make that guarantee.

Note, I am a very big fan of Fidelity in general.

 

[Marc]

I am curious. Did he make specific recommendations for the length of the deferred period, and explain how it would contribute overall to your financial plan for retirement?

No, he did not; he just pointed to the page on fidelity.com that provides the information; he just offered it as option to provide for the cash portion of my portfolio. I have since gone on the page and see surrender period (usually three years) and rate of return (about same or little higher than five year ladder) but I can't figure out how to make an apples to apples comparison.

Marc

 

[nun]

The main difference I see is flexibility and access to your money. With a CD ladder you will roll the money over each year and can decide what to do with the interest. With a deferred fixed annuity you are locked in. So you need to look at the rates of return and see what makes best sense for you.

For example, I have a deferred annuity with TIAA cref that pays a minimum of 3% with an annual bonus......this year it's 1.85% so it's returning 4.85%. That's better than any CD, but the annuity has strict withdrawal rules so I just use it as part of my long term fixed income allocation; I can take out the interest every year, turn it into a lifetime annuity or to get at all the money take out 10% over 10 years. For immediate access cash saving I use a stable value fund in my 457 account.

 

[pb4uski]

I suspect that these are what you are looking at?

https://fundresearch.fidelity.com/annuities/spda-rates/AL

Issuer/Product	Guarantee/Surrender Period	Base Rate3	Jumbo Rate
MassMutual Stable VoyageSM	3/3 YR	2.30%	2.55%
New York Life Secure Term MVA Fixed IV	3/3 YR	2.40%	2.55%
Principal Select Series	3/3 YR	2.20%	2.30%
MassMutual Stable VoyageSM	4/4 YR	2.30%	2.55%
New York Life Secure Term MVA Fixed IV	4/4 YR	2.60%	2.75%
Principal Select Series	4/4 YR	2.50%	2.65%
Guardian Fixed Target AnnuitySM	5/5 YR	1.60%	1.70%
MassMutual Stable VoyageSM	5/5 YR	2.40%	2.65%
New York Life Secure Term MVA Fixed IV	5/5 YR	3.05%	3.10%
Principal Select Series	5/5 YR	2.70%	2.85%
3.The Base Rate remains constant throughout the Guarantee Period after which the rate is renewed according to the annuity contract.

Why would one even consider those when Fidelity is offering better CD rates? My educated guess is that the rep is pushing annuities because he/they make more commission on an annuity sale than on a CD sale.

CD Rates on New Offerings*
Term	Expected Yield
3 months	1.90%
6 months	2.05%
9 months	2.15%
1 year	2.35%
2 years	2.80%
3 years	3.00%
5 years	3.35%

A 5 year CD ladder (20% in 1,2,3,4 and 5 year CD) would yield ~2.9% better than most of the annuities offered, FDIC insured and probably a lower cost if you need to access your money before the end of the term.

 

[brewer12345]

This is probably all about enhancing the fido guy's retirement via commissions.

 

[Marc]

pb4uski, thanks.

I have never had Fidelity rep ever try to push a product on me including this time; he recommended I consider it. I thank everyone for the feedback and will stay with my plans for a cd ladder.

Again, thanks,

Marc

 

[pb4uski]

Ok, I guess that I misinterpreted the veracity of his effort... good to hear it was a soft pitch. I may put some money at Fido if PenFed doesn't offer an attractive rate for CDs come December when by 3%ers mature.

 

[Dtail]

Ok, I guess that I misinterpreted the veracity of his effort... good to hear it was a soft pitch. I may put some money at Fido if PenFed doesn't offer an attractive rate for CDs come December when by 3%ers mature.

pb4uski - just to note, except for the 401k, all my investments are with Fidelity.
I made it super clear to the last 2 reps that I am a DIY investor and they don't push anything on me, but I can also get their opinions on ideas at no cost.

 

[Red Badger]

pb4uski - just to note, except for the 401k, all my investments are with Fidelity.
I made it super clear to the last 2 reps that I am a DIY investor and they don't push anything on me, but I can also get their opinions on ideas at no cost.

Same here. During our first meeting, the Fido guy suggested annuitizing a portion of our egg. I responded, "maybe not never, but not now." He's never brought it up again.

 

[MRG]

pb4uski - just to note, except for the 401k, all my investments are with Fidelity.
I made it super clear to the last 2 reps that I am a DIY investor and they don't push anything on me, but I can also get their opinions on ideas at no cost.

I made that very clear to my lat Private Client representative. He went ahead and did a hard sell on putting 50% of my assets in an annuity. After several calls to the branch manager I no longer have a private client representative, or any support past the 800 number.

Fidelity has some interesting folks.

 

[Huston55]

I made that very clear to my lat Private Client representative. He went ahead and did a hard sell on putting 50% of my assets in an annuity. After several calls to the branch manager I no longer have a private client representative, or any support past the 800 number.

Fidelity has some interesting folks.

Somewhat similar experience here.

First FIDO B&M Private Client Rep pushed annuitizing 50%+/- of assets coinciding with FIRE; never saw him again after second ‘hard sell’ meeting. Second (current) Rep is much more supportive of our DIY approach, understands & complemented us on our IPS, and is always there to help when needed.

At least in our case, I think the difference in approach is largely due to the Reps’ respective backgrounds. I looked them up: first guy has an insurance sales background, and IIRC insurance certs/licenses; second guy has financial certs/licenses.

 

[JoeWras]

The other thing is if you use the deferred annuity, it changes your tax situation. This can be good or bad, depending on your goals.

 

[capjak]

I suspect that these are what you are looking at?

https://fundresearch.fidelity.com/annuities/spda-rates/AL

Issuer/Product	Guarantee/Surrender Period	Base Rate3	Jumbo Rate
MassMutual Stable VoyageSM	3/3 YR	2.30%	2.55%
New York Life Secure Term MVA Fixed IV	3/3 YR	2.40%	2.55%
Principal Select Series	3/3 YR	2.20%	2.30%
MassMutual Stable VoyageSM	4/4 YR	2.30%	2.55%
New York Life Secure Term MVA Fixed IV	4/4 YR	2.60%	2.75%
Principal Select Series	4/4 YR	2.50%	2.65%
Guardian Fixed Target AnnuitySM	5/5 YR	1.60%	1.70%
MassMutual Stable VoyageSM	5/5 YR	2.40%	2.65%
New York Life Secure Term MVA Fixed IV	5/5 YR	3.05%	3.10%
Principal Select Series	5/5 YR	2.70%	2.85%
3.The Base Rate remains constant throughout the Guarantee Period after which the rate is renewed according to the annuity contract.

Why would one even consider those when Fidelity is offering better CD rates? My educated guess is that the rep is pushing annuities because he/they make more commission on an annuity sale than on a CD sale.

CD Rates on New Offerings*
Term	Expected Yield
3 months	1.90%
6 months	2.05%
9 months	2.15%
1 year	2.35%
2 years	2.80%
3 years	3.00%
5 years	3.35%

A 5 year CD ladder (20% in 1,2,3,4 and 5 year CD) would yield ~2.9% better than most of the annuities offered, FDIC insured and probably a lower cost if you need to access your money before the end of the term.

The Fidelity picked MYGAs are not competitive 3 year MYGA is at 3.1% for B++ and 2.9% for A+ rated insurance companies, 5 year 4.0% B++ and 3.35% for A+ with 10% of premium surrender free per year withdrawal.

MYGAs would be tax deferred as they are considered retirement plans and therefore incur the penalty if withdrawal before 59.5 years old

 

[jazz4cash]

The Fidelity picked MYGAs are not competitive 3 year MYGA is at 3.1% for B++ and 2.9% for A+ rated insurance companies, 5 year 4.0% B++ and 3.35% for A+ with 10% of premium surrender free per year withdrawal.



MYGAs would be tax deferred as they are considered retirement plans and therefore incur the penalty if withdrawal before 59.5 years old

A MYGA purchased without an IRA designation is not subject to the 59.5 EWP.

 

[capjak]

A MYGA purchased without an IRA designation is not subject to the 59.5 EWP.

I thought the growth/interest earned was subject to penalty?

When you take a 10% distribution before it matures, it is surrender free but since interest is distributed first I thought that portion is subject to the 59.5 EWP, correct?

 

[jazz4cash]

I thought the growth/interest earned was subject to penalty?



When you take a 10% distribution before it matures, it is surrender free but since interest is distributed first I thought that portion is subject to the 59.5 EWP, correct?

I think you are correct and I was wrong about the IRA designation making a difference. I’ve looked into these before and thought I learned everything I needed to know but I missed this detail.