How Savers Can Earn More on Their Money, and Do It Safely

With interest rates perpetually doing the limbo (how low can they go?), here are three different types of fixed annuities that can be good alternatives to CDs, Treasuries and money market accounts.

Interest rates on most safe investments, such as savings accounts, bank CDs, money market accounts and Treasury bonds, are super low these days. When you factor in even a tiny bit of inflation, you’re losing money in them, even before you pay income tax.

What are the best alternatives for people who want to get a higher guaranteed rate of interest?

It’s a big issue for people in their late 50s and older who don’t want to risk too much in the stock market and for retirees who rely on savings for income. Here are three good alternatives, all classified as fixed annuities, but different from one another.

Fixed-rate annuities pay higher guaranteed rates

Also called a multi-year guaranteed annuity, a fixed-rate annuity acts a lot like a bank CD. Both guarantee a rate of interest for a set period. But there are some key differences.

One is that fixed-rate annuities pay much higher rates than comparable CDs today. As of early February 2021, you can earn up to 3.00% a year on a five-year fixed-rate annuity and up to 2.40% on a three-year contract, according to AnnuityAdvantage’s online rate database. Meanwhile, the top rate for a five-year CD is 1.00% and 0.85% for a three-year CD, according to Bankrate.

Annuity rates have held up remarkably well so far, but they are declining. If you’re interested in a fixed annuity, it could pay to take action sooner rather than later as you’ll probably get a better rate today than next month or beyond.

Another difference between annuities and savings accounts or Treasuries is that with an annuity, the interest you earn is tax-deferred until you withdraw it. You can either receive the interest annually and pay tax or let it compound in the annuity and thus defer taxes.

There’s one major caveat. If you withdraw money from an annuity of any type before age 59½, you’ll normally owe the IRS a 10% penalty on the interest earnings you’ve withdrawn, plus regular income tax on it. So, if you’re much younger than 59½, don’t buy an annuity unless you’re sure you won’t need to take out money before that age.

Another thing to keep in mind is that annuities of all types are guaranteed by the issuing insurance company. They are not FDIC insured like bank CDs and savings accounts. State annuity guaranty associations do provide a solid extra level of protection, however.

Fixed annuities are suitable for both nonqualified accounts (savings that would otherwise be taxable) and in qualified retirement plans, such as IRAs, Roth IRAs, and 401(k) and 403(b) plans.

Fixed indexed annuities offer potentially higher returns over the long term

Indexed annuities credit interest based on the growth of a market index, such as the S&P 500. The interest rate thus fluctuates annually.  In up years, you’ll profit (keeping in mind that the size of your gains could be subject to caps and limits). In down years, you’ll lose nothing, but you won’t earn anything either.

So, for example, in year one you might earn 9%, 0% in year two, 4% in year three, and so on. If you’re OK with the risk of earning nothing some years, in the long run, you’ll likely earn more interest than you’d get with a fixed-rate annuity.

Indexed annuities are good for people who want to save for the long term and limit their risk without precluding growth. They’re not typically suited for people who need steady income right away to cover living expenses. Think of them as a distinct third class in an asset-allocation plan:  fixed-income (CDs, bonds and other fixed annuities); equities (stocks and stock funds); and indexed annuities.

Because there are different crediting methodologies and caps, it takes some research to compare and determine which indexed annuity is best suited for you. Work with an annuity specialist who has the necessary resources and training to assist you in this process. 

Income annuities produce much more guaranteed income

If you’re looking for the most guaranteed income, here’s an alternative you may not have thought of: an income annuity. Unlike fixed-rate or fixed indexed annuities, once purchased income annuities have no accumulation value, so they don’t pay a stated rate of interest. You pay a lump sum or a series of deposits to the insurer, which guarantees a stream of income.

You choose how long the payments last — for example, you could select 10 years. Most people, however, choose a lifetime annuity that will pay you (and optionally, your spouse) guaranteed monthly income no matter how long you live.

Income annuities produce more income because each income payment is made up of both taxable interest and tax-free return of principal (your own money coming back to you). It’s a bit like the flip side of a mortgage, where each payment you make includes principal and interest. A mortgage gets paid off eventually. However, lifetime income annuities keep on paying the same amount, even after the insurer has repaid your entire principal.

Lifetime income annuities serve as longevity insurance. They protect you against the risk of running out of money should you live into your 90s or beyond.

Income annuity payments come in 2 types: deferred or immediate – your choice

A deferred income annuity, which pays out starting on a future date that you choose, lets your money grow tax-deferred until you start receiving income. If you can afford to wait, it’s usually the better choice because the deferred income payments will be larger than immediate payments.

If you need substantial income soon, an immediate annuity can be a great solution. Typically, you’ll start receiving monthly payments within about a month of purchase. Many insurers will let you delay the start by up to a year if you like.

So, to sum things up, fixed-rate, indexed and income annuities all let you earn more on your money, safely, than bank CDs, Treasuries or savings accounts.  They also offer tax deferral, another big plus.  If you won’t need to tap your money before age 59½, all these different types of annuities are worth considering.

A free quote comparison service with interest rates from dozens of insurers is available at or by calling 800-239-0356.

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.

Most Popular

Dying Careers You May Want to Steer Clear Of

Dying Careers You May Want to Steer Clear Of

It’s tough to change, but your job could depend on it. Be flexible in your career goals – and talk with your kids about their own aspirations, because…
September 13, 2021
Your Guide to Roth Conversions
Special Report
Tax Breaks

Your Guide to Roth Conversions

A Kiplinger Special Report
February 25, 2021
7 Best Commodity Stocks to Play the Coming Boom

7 Best Commodity Stocks to Play the Coming Boom

These seven commodity stocks are poised to take advantage of a unique confluence of events. Just mind the volatility.
September 8, 2021


10 Ways You Could Avoid the 10% Early Retirement Penalty

10 Ways You Could Avoid the 10% Early Retirement Penalty

You’ve saved diligently in your 401(k), and you wouldn’t mind tapping into it – but you’re not age 59½ yet, so you could have to pay the IRS a 10% pen…
September 21, 2021
Yes, Your 401(k) Has Its Perks, But It’s Not the Only Way to Save
how to save money

Yes, Your 401(k) Has Its Perks, But It’s Not the Only Way to Save

Tax diversification can play a vital role in stretching your retirement savings. Here’s how to achieve the flexibility you need with a three-bucket sy…
September 20, 2021
These 2 Emotional Biases Could Kill Your Retirement
Investor Psychology

These 2 Emotional Biases Could Kill Your Retirement

Are your emotions sabotaging your retirement plans? Some basic knowledge and careful introspection can go a long way toward avoiding major pitfalls.
September 20, 2021
Investment Strategies for the 4 Stages of the Economic Cycle

Investment Strategies for the 4 Stages of the Economic Cycle

The U.S. economy is cyclical in nature, surging ahead and pulling back in waves over time. Investors’ portfolios need to change with the rise and the …
September 19, 2021