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"If you want to retire well, you will need to be even more vigilant about protecting your cash, both now and in the future."
Aside from the near-zero interest rates, people who save in traditional vehicles such as CDs and savings accounts face increased fees and potential institutional insolvency. When the economy shows signs of faltering, the Federal Reserve typically cuts interest rates. While this can be okay, it punishes those with large cash reserves parked in CDs or savings accounts, often causing them to take more risks with their money than they usually would. Banks continue to tighten lending standards and aggressively avoid risk despite historically low-interest rates, making it more difficult for small businesses and individuals to borrow money.
In a shaky economy, safety rules.
When there is economic uncertainty, most people crave safety, especially if they can retire in a few years. Although they are well aware of the erosive effects of inflation on their wealth, many retirees are afraid of losing money they don't have time to replace. That's why those near retirement often seek to transfer their more vulnerable assets to safer vehicles, such as annuity products or bank Certificates of Deposit (CDs).
Should you choose an annuity or CD?
Suppose you are someone with cash reserves withering away in a low-to-zero interest account and want to find ways to make that money work harder and smarter for you. On the one hand, it's hard to resist the siren song of higher returns in the market. But, on the other hand, when you are within a few years of retirement, the thought of losing even a penny of your nest egg is nearly intolerable.
After exploring their goals and risk tolerance, many pre-retirees choose to balance their portfolios with "safe money" products, such as annuities or Bank CDs. While CDs are a traditional safe money choice, annuity products offer additional advantages. In deciding whether to place money in an annuity or a CD, you should ask yourself:
The takeaway: When economies falter, safety becomes of paramount importance, especially for those near retirement or who have already left the workforce. Both annuities and bank CDs offer wealth protection. However, annuities may fit better with their long-term financial objectives for those with specific goals.
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