Making Your Money Last

Shelter from the Storm: Safe, 'Boring' Financial Products Are Exciting Today

That's especially true for people in their 60s and older. Those looking to earn a little more than what's offered by U.S. Treasury bonds and CDs might want to take a look at deferred fixed annuities.

As you approach and then enter retirement, it’s wise to gradually shift much of your savings into vehicles that guarantee your principal while providing a good interest rate.

The stock market’s extreme volatility in 2020 shows that relying too heavily on equities exposes mature investors to unneeded risk. They need ways that reduce risk while having their after-tax savings grow at a rate that keeps up with or exceeds inflation.

U.S. Treasury bonds and notes are tops for safety, but safety comes at a cost. Rates are very low today. A 10-year Treasury, for instance, was paying 0.76% in mid-April 2020.

Bank certificates of deposit are safe because they’re insured by the FDIC up to $250,000 per depositor. Rates are typically higher than Treasury rates but are generally low. Unless held in a retirement account, CD interest counts as fully taxable income in the year it is credited.

Where can savers earn more? One often-overlooked product is the fixed annuity. It can offer higher interest rates than the alternatives. And it provides tax deferral.

Are annuities safe?

Annuities are issued by life insurance companies. Because of COVID-19, life insurers will likely pay an unusually large number of death claims in the next year or so, though there may be fewer deaths from other causes, notably auto accidents.

The evidence suggests that annuities are still safe and will continue to be so. Life insurers, after all, exist to pay death claims and annuity benefits. Their finances are structured with a large margin of safety. They are regulated by the states to ensure their solvency.

Should an insurer become insolvent, annuity owners are protected by the state guaranty association in the state where they live. The coverage limit can be anywhere from $100,000 to $500,000, depending on the state, but it is commonly $250,000.

Choosing a financially strong insurer gives annuity buyers an additional margin of safety.

Different types of fixed annuities all guarantee your principal. They help you save more money faster because you won’t pay a penny of federal or state income tax as long as you let the interest accumulate in the annuity.

And they provide flexibility. In the future, you may choose to “annuitize” and convert the accumulation value into an income annuity and receive a guaranteed stream of income for life.

Fixed-rate annuities

There are two main types of deferred fixed annuities: fixed-rate and fixed-indexed.

Fixed-rate annuities pay a set interest rate for a set term. For example, you can earn 3.50% annually for seven years or 3.10% for a five-year fixed-rate annuity, as of mid-April 2020.

While they somewhat resemble bank CDs, they also offer tax deferral, which can be extended indefinitely until death. Once the initial term is over, you may exchange the proceeds into another annuity of any type (called a 1035 exchange) without triggering taxes. Tax deferral helps build wealth.


  • The set interest rate is guaranteed from three to 10 years. The rate is typically higher than those offered by a bank CD with a similar term.
  • Principal and interest are guaranteed by an insurance company.
  • Tax-deferral on interest earnings left in the annuity to compound.
  • Some liquidity. Many annuities allow annual withdrawals of up to 10% without penalty.
  • Simplicity. The product is easy to understand and comparison-shop.


  • There’s a penalty if you surrender the policy before the term is up.
  • Withdrawals of earnings before age 59½ are subject to a 10% IRS penalty in addition to ordinary income tax — unless the policy is annuitized.
  • There’s no growth potential beyond the guaranteed interest rate. The rate is set for the entire guarantee period.
  • Withdrawals of interest earnings are taxed as ordinary income.

Fixed-indexed annuities

Fixed-indexed annuities pay a fluctuating interest rate pegged to the annual percentage change of an index, such as the S&P 500, without the downside risk. You get a portion of the market’s upside in return for complete protection against loss. For example, if a cap of 8% is placed on the S&P 500 index of a fixed-indexed annuity, then 8% is the most you may earn for that period. If the S&P 500 returns 12% or even 50% that year, you’d still get 8%. However, if the S&P falls 30%, your account value doesn't change that year. They’re typically suited for investors with a longer time horizon.


  • Higher potential long-term returns than other guaranteed products. You’re likely to earn more in the long term even though year-by-year results will vary.
  • “Having your cake and eating it too.” This is the only product that guarantees principal and eliminates the risks of equity markets while offering participation (albeit limited in some way) in rising markets.
  • Options. For instance, a lifetime income rider is available for an extra fee.


  • Inconsistent results. There may be years when you earn no interest — however, you won’t lose money.
  • Complexity. Crediting methods for interest vary. Upside limits may be based on a cap rate, participation rate or spread rate. They all operate slightly differently, and it’s important to understand the distinctions before you commit.
  • Limited liquidity. Fixed-indexed annuities almost always contain provisions that subject contract owners to penalties for excess withdrawals during the initial surrender charge period, typically five to 10 years. Many will allow the owner to withdraw up to 10% annually without penalties. However, withdrawals made before age 59½ may be subject to a 10% federal tax penalty. Make sure you carefully consider your liquidity needs before purchasing any annuity.

There’s no one right answer for everyone. Some people are most comfortable with putting their savings in a simple fixed-rate annuity. Many people are attracted by an indexed annuity’s combination of growth potential and guaranteed principal. And some folks are best served by putting some of their money in each type.

Income annuities are also well worth considering. I’ll discuss them in my next article.

About the Author

Ken Nuss

CEO / Founder, AnnuityAdvantage

Retirement-income expert Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed and immediate-income annuities. It provides a free quote comparison service. He launched the AnnuityAdvantage website in 1999 to help people looking for their best options in principal-protected annuities.

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