Stability of Principal vs. Stability of Income – CDs vs. Variable Annuities

Many conservative investors like Certificates of Deposit (CDs) because of their stability. It is true that your principal rarely fluctuates with a CD. However, the rate you get is variable, volatile and highly unpredictable as has been evidenced by interest rates in the economy over the past 15 years. As a result, if you were rolling over one-year CDs from the late 90’s until now, your income would have fluctuated dramatically. From 1996-1999, one-year rates ranged from about 4.5% – 6.5%: a respectable return for a conservative investor. Keep in mind that the stock market in those years was on fire, so that 5% CD rate may not have felt as warm and fuzzy as it would today. After year 2000, interest rates plunged and you were lucky to get 2% on a one-year CD. The same applies today as interest rates are low and CD investors find themselves scrambling for a ‘good rate’ such as 3% or maybe 4% if you lock in for years. So the new important question becomes, what is more important: stability of principal or stability of income?

Some advisors might suggest that “income guarantees” are more valuable than “principal guarantees.” It becomes difficult to pay retirement expenses and/or plan a budget when every year the income derived from your CD investments changes dramatically. Part of the reason variable annuity sales have skyrocketed over the last few years is that insurance companies are able to offer living benefits including guaranteed income for life. Unlike CDs, annuities rarely make guarantees as to the principal value of your account. But they do provide several guarantees as to the income generated by the account, often for life. The concept of guaranteed income for life is very valuable to investors in an atmosphere in which the stock and bond markets are highly volatile and people are living much longer lives. The ‘peace-of-mind’ component often outweighs the added insurance expenses and people choose to have at least some portion of their retirement funds dedicated to this vehicle. It should be clear that any insurance promise of “guaranteed income for life” is subject to specific restrictions and limitations. For example, these options often require annuity owners to begin receiving income at particular ages with withdrawals limited to specific percentages or dollar amounts. Reading the full prospectus is the only way to get complete information on various product offerings.
Besides offering a more predictable income stream than CDs, variable annuities offer the potential to grow principal on a tax-deferred basis for retirement which may also provide value to your estate plan. It might pay if you’re a conservative investor nearing retirement to look into some variable annuity strategies in addition to those good old CDs.
Russell Bailyn

Wealth Manager
Premier Financial Advisors, Inc.
14 E 60th St. #402
New York, NY 10022
P: 212-752-4343 *231
F: 212-752-7673
*Guarantees are based on claims-paying ability of the issuer. Surrender charges may apply. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. The investment returns are principal value of the available sub-account portfolios will fluctuate so that the value of an investor’s unit, when redeemed, may be worth more or less than their original value. Optional features may involve additional fees, expenses, limitations and restrictions.
CD’s are FDIC insured and offer a fixed rate of return if held to maturity. Annuities are not FDIC insured.
The enhanced income benefit is based upon the claims paying ability of the issuing insurance company and does not apply to the contract value which fluctuates daily. There may be an additional cost for income benefit features of some variable annuities, and depending on the performance of the investment option(s) selected, the contract value at the time of annuitization could be such that the investor would incur a higher expense with the income benefit feature without receiving any explicit benefit.
Variable annuities are long-term investments designed for retirement. The value of the variable investment options will fluctuate and when redeemed, may be worth more or less than the original cost.
Variable annuities are sold by prospectus. For more complete information about underlying fund investment objectives, risks, charges, limitations and expenses, please read the prospectus carefully before investing or sending money.
Purchasing an annuity within a retirement plan that already provides tax deferral under sections of the Internal Revenue Code results in no additional tax benefit. You should purchase an annuity for the contract features and benefits other than tax deferral.
Securities and certain investment advisory services offered through: First Allied Securities, Inc., a registered Broker/Dealer. Member: FINRA/SIPC. Premier Financial Advisors, Inc. is a Registered Investment Advisor. First Allied Securities & Premier Financial Advisors are not affiliated entities.

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