Annuities and certificates of deposit (CDs) are staples among many conservative retirees who don’t want to lower their risk profile as they enter their advanced years. Undoubtedly, it only makes sense to go for lower-risk instruments so that one can stay retired, regardless of what happens to the economy and the stock market.

Though the Federal Reserve has cut interest rates, interest rates on low-risk investment solutions like annuities and CDs remain attractive. Indeed, perhaps there’s a reason that these investments have exploded in popularity in recent years. And though the Fed is likely to keep cutting rates, there are risks out there that could cause a lengthy pause or even a surprise pivot back to rate hikes if inflation becomes a problem again.

Either way, don’t expect annuities and CDs to go out of style anytime soon. Not when you can lock in a rather decent interest rate without having to take on excessive amounts of risk. At the end of the day, for an aging retiree, it can be a far better move to go for that guaranteed risk-free (or low-risk) rate than risk a great deal of your principal (and retirement future) for a shot at a great return. Of course, every retiree’s risk profile will differ drastically, regardless of their age.

Annuities and CDs are popular picks among retirees as rates stay high

In any case, the boom in annuities and CDs is remarkable. And for retirees who aren’t so convinced the S&P 500 can pull off the “hat trick” of three straight years of 20%+ returns, now seems like a fantastic time to take a step back with an annuity or a CD. And while the two investments are very similar, catering to similar target audiences (conservative investors seeking low-to-no-risk returns), there are differences worth knowing before you commit to either.

At the end of the day, these investments may be lower-risk with decent returns, but they’re quite illiquid — the price you’ll pay for the lower-risk profile. To some, less liquidity is a dealbreaker. However, for many who want assurances in retirement, such instruments serve as great tools to derisk a retirement portfolio, especially when the equity risk premium gets narrow due to rising valuations in the equity markets.

We all want to see the S&P 500 pull off a three-peat with another year of 20% or more gains in 2025. Whether we’ll get one, though, remains the big question. Either way, the stakes are higher, making low-risk options worth checking out. But are annuities or CDs the better option for you? Let’s find out.

Should you buy annuities?

Annuities were a rather sleepy asset class before the Fed began hiking rates a few years ago to combat inflation. Nowadays, annuities are solid options for conservative investors seeking custom-tailored features and are willing to commit to a lengthy time horizon.

Undoubtedly, insurance firms, rather than banks, offer annuities, and the protections in the event of an issuer’s failure will differ from state to state. It’s also noteworthy that in the case of an insurer’s failure, annuities are not protected under the FDIC like CDs. That’s why it’s vital to go with a trusted, high-quality insurer if you’re in the market for an annuity while also researching the protections you will be covered for. 

Further, annuities come in all sorts of flavors. You have ones that defer gains to a later date and ones that pay out interest at fixed (or non-fixed) intervals to meet the passive income needs of retirees. Additionally, some annuities may offer other customizable features that prospective buyers should investigate before purchasing. 

Retirees willing to lock in an amount for an extremely long duration (think six years or more) may get a better bang for the buck with annuities regarding rates. However, the big downside against annuities, in my opinion, is the potential for heftier fees.

Given commissions and other fees involved with annuities, an argument could be made that these products (sold by many salespeople) may not be too efficient. If a salesperson needs to be paid, that’s less money in your pocket. Also, given annuities are relatively more complex investments, it can be easy to get confused or buy a product you don’t fully understand. That’s why I’d strongly advise contacting a financial advisor before meeting with an annuity salesperson. Perhaps the customizability is worth the added complexity and fees for certain retirees.

Or go for CDs?

CDs are a simpler option for investors looking to lock away cash for some length of time. They’re easy to pick up from your local bank, and the rates are still rather good, though perhaps not as good as annuities in some cases. Either way, if you’re looking to lock away cash for a medium-term duration (think one to four years), CDs may be the better option.

While you’ll still pay fees for early withdrawals (early withdrawal penalties vs. surrender charges of annuities), I view the penalties as less harsh than for your average annuities. That is, of course, we’re not talking about an annuity designed for flexibility (some may allow for partial withdrawals).

Given the relative simplicity of CDs, I’d argue CDs are a better bet for retirees who don’t know if they’ll need extra cash to pay for an emergency expense that may arise in the distant future. Sure, you can’t get interest payments every so often from CDs, but, at the very least, you can roll over the amount every shorter-term duration to enable greater liquidity versus most annuities.

In short, I like CDs because of their simplicity and efficiency. Though they may lack features and fall short on rates given a lengthier term, but I find them suitable for retirees who value simplicity and flexibility over customizable features.

The bottom line

Annuities and CDs are both compelling options for retirees looking for low-risk and fairly decent returns. However, they must be willing to sacrifice some degree of liquidity.

If you just need to have a specific feature (let’s say, tax deferral or fixed income), annuities may be the better option, given their customizability. Just make sure you understand what you buy and the fees you’ll pay. For retirees who want a simple option and don’t care all too much for feature-rich products meant for the super long haul, CDs may be the right pick. As always, contact an advisor to discuss annuities vs. CDs in greater detail. 

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