Choosing between annuities and certificates of deposit for retirement planning There are many ways to save for retirement, and each has its own benefits based on your financial goals and risk tolerance. A lot of people choose annuities and certificates of deposit (CDs) as options for their retirement income. They can help with planning for the future and provide financial security. Here’s a closer look at the advantages of annuities and CDs, the key differences between the two, and how to determine which one may be a good match for personal retirement goals.
Ever think about whether or not those dull CDs your grandmother used to talk about should be a part of your retirement plan? I did too, and after doing some research, I have some surprising results to share with you.
It’s not enough to just look for the highest returns when planning for retirement. You need to find the right balance between risk and reward as well. For that reason, you might want to take another look at Certificates of Deposit (CDs), especially if you’re getting close to retirement age.
What Exactly Are CDs and IRA CDs?
Before we dive in, let’s get on the same page about what we’re talking about here.
A CD is basically a time deposit where you agree to leave your money untouched for a specific period (ranging from a few months to 5+ years) in exchange for a guaranteed interest rate Think of it as locking your money in a safe that pays you for keeping it there
An IRA CD combines the tax advantages of an Individual Retirement Account with the stability of a Certificate of Deposit. Essentially, it’s an IRA that’s invested in CDs rather than stocks or bonds. Your IRA serves as the container, and the CDs are the investments inside it.
The Good Stuff: Why CDs Might Make Sense for Your Retirement
1. Safety First
One good thing about CDs is that they are safe. An FDIC-insured bank will protect your principal up to $250,000 per depositor, per bank, when you buy a CD from that bank. Your money is safe even if the bank fails because of this federal insurance.
As financial planner Dennis Nolte puts it: “We’re holding CDs in lieu of bond funds in clients’ IRAs, especially those who are older than 59 1/2 who want security for at least a portion of their portfolios with basically no fee.”
2. Guaranteed Returns
Unlike the stock market’s wild rollercoaster, CDs offer predictable returns. When you open a CD, you know exactly how much interest you’ll earn by the end of the term. This predictability can be incredibly valuable when you’re planning your retirement income.
3. Great for Short-Term Income Needs
One of the smartest ways to use CDs in retirement is to create a CD ladder for predictable short-term income.
Kristin Sullivan, a financial planner from Denver, explains: “The good thing about using CDs in an IRA is the ability to create a ladder for predictable income in the short term.”
4. Protection Against Sequence of Return Risk
If you’ve just retired or are about to, one of the biggest dangers to your nest egg is called “sequence of return risk” – basically, the risk of the market tanking right when you start withdrawing from your retirement accounts. CDs can help shield some of your money from this risk.
How to Actually Use CDs in Retirement (Without Making Big Mistakes)
Focus on Short-Term “Extra” Cash
CDs aren’t meant to hold all your retirement savings. Instead, think of them as a place for your “extra” short-term savings beyond your emergency fund. Your emergency cash should stay in a regular savings account where you can access it anytime.
Build a CD Ladder for Flexibility
A CD ladder is a way to invest your money by putting equal amounts of it into CDs with different due dates. Say you want to split $30,000 into three $10,000 CDs with terms of one, two, and three years.
This strategy gives you regular access to some of your money while still benefiting from higher rates on longer-term CDs. As each CD matures, you can either use the money or roll it into a new CD to keep the ladder going.
Shop Around for the Best Rates
Don’t just accept whatever CD rate your local bank offers! Online banks and credit unions typically offer much better rates. As of September 2025, high-yield rates are around 4% APY for six-month and one-year terms, while three and five-year terms are closer to 3.50%.
You can also look into brokered CDs available through brokerages, which might offer competitive rates with some additional flexibilities.
Consider IRA CDs for Tax Benefits
Regular CD interest gets taxed at your normal income tax rate in the year you earn it. That can take a big bite out of your returns, especially with today’s higher interest rates.
IRA CDs offer tax advantages that regular CDs don’t. With traditional IRA CDs, you won’t pay taxes on the interest until you withdraw it in retirement. With Roth IRA CDs, you might not pay taxes on the interest at all if you meet certain conditions.
The Not-So-Good: Why CDs Aren’t a Perfect Retirement Solution
1. Lower Returns Than Other Investments
Let’s be real – CDs typically offer lower returns compared to stocks and bonds over the long term. Mychal Eagleson, a financial planner in Indianapolis, points out: “No matter the environment, interest rates on CDs are always only a small percentage higher than the prevailing rate of inflation.”
2. Limited Access to Your Money
When you put money in a CD, you’re generally locked in until maturity. Early withdrawals usually come with penalties, which could be months to years’ worth of interest earned.
3. Inflation Risk
CDs don’t always keep pace with inflation, which means your money might actually lose purchasing power over time, even as the dollar amount grows.
4. Opportunity Cost
By locking your money in a CD, you miss out on potentially higher returns from other investments. Artie Green, a financial planner in Los Altos, CA, says: “It’s best to get as much growth as possible in an IRA. If the IRA owner is young, it makes the most sense to invest in higher-yielding assets.”
5. Limited IRA Contribution Space
Your annual IRA contributions are limited to $6,000 (or $7,000 if you’re over 50). Using this valuable tax-advantaged space for lower-yielding CDs might not be the most efficient strategy, especially if you’re younger.
When Do CDs Make The Most Sense for Retirement?
CDs shine brightest in these scenarios:
- You’re close to or in retirement: When your timeline for needing the money is shorter, the security of CDs becomes more valuable.
- You need a guaranteed income stream: For retirees who need predictable income, CD ladders can provide regular cash flow.
- You’re extremely risk-averse: If market volatility keeps you up at night, allocating some retirement funds to CDs might help you sleep better.
- You have substantial retirement savings: If you’ve already accumulated enough that you only need modest returns to maintain your lifestyle.
A Smart Example of Using CDs in Retirement
Here’s a practical scenario: Imagine you’re preparing to retire and decide to take a lump sum of $150,000 to help settle into retired life. After all your initial expenses, you end up only spending $125,000. Instead of just parking that leftover $25,000 in a low-yield savings account, you could reinvest it in a CD for a guaranteed return.
Creating a Balanced Approach with CDs
The smartest approach isn’t an all-or-nothing decision about CDs. It’s about finding the right mix for your specific situation. Here’s what I’d recommend:
- Have a proper emergency fund first in a high-yield savings account (3-6 months of expenses).
- Create a CD ladder for short-term needs (1-3 years of expected expenses).
- Keep the bulk of your retirement in a diversified portfolio of stocks, bonds, and other investments appropriate for your age and risk tolerance.
- Consider IRA CDs for a portion of your conservative allocation, especially if you’re nearing or in retirement.
5 Tips for Using CDs in Your Retirement Strategy
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Don’t over-allocate to CDs: As Chris Baker, a financial planner, points out, “The only possible use of an IRA CD would be for money you know you will need to withdraw in the next 12 to 24 months.”
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Check early withdrawal penalties: Before committing to a CD, understand what happens if you need the money sooner than expected.
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Compare CD rates regularly: CD rates change frequently, so shop around when a CD matures rather than automatically rolling it over.
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Consider no-penalty CDs: These offer more flexibility, though usually at a slightly lower rate.
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Don’t forget about taxes: Remember that CD interest outside an IRA is taxed as ordinary income, which can significantly reduce your effective return.
The Bottom Line: Are CDs Good for Retirement?
So, are CDs good for retirement? Well, it depends (don’t ya hate that answer?). They’re not a one-size-fits-all solution, but they can be a valuable piece of your retirement puzzle in the right circumstances.
CDs make the most sense as part of a broader retirement strategy, particularly for:
- Holding short-term cash you’ll need in the next 1-3 years
- Creating predictable income streams through CD ladders
- Protecting a portion of your savings from market volatility
- Balancing riskier investments in a diversified portfolio
For most of us, though, CDs shouldn’t be the main star of our retirement show. They’re more like a reliable supporting actor – not flashy, but they show up when needed and deliver a consistent performance.
Remember, the most successful retirement strategies aren’t about finding one perfect investment – they’re about creating the right mix of investments that work together to provide growth, income, and security throughout your retirement years.
What’s been your experience with CDs? Have you used them in your retirement planning? I’d love to hear about your experiences in the comments below!
Key differences between an annuity and a CD
An annuity and a certificate of deposit (CD) are both financial products designed to offer stable, predictable returns. A fixed annuity can guarantee a steady stream of income for a certain amount of time or for life, depending on the contract. A CD, on the other hand, has a fixed interest rate for a set amount of time and returns the principal plus any interest earned at the end of the term.
Both options are relatively safe, often backed by insurance companies or financial institutions, and can provide guaranteed interest. But an annuity and a CD are not the same in important ways that can affect how they fit into a retirement plan.
|
Differences |
Certificate of Deposit (CD) |
Annuity |
|---|---|---|
| Payout structure | Pay interest over a set term and return the principal at the end.1 | Typically provide periodic payments which can be structured to last for a specific number of years or for the rest of an individual’s life. |
| Duration | Have a fixed term, generally ranging from a few months to several years. 1 | Can be long-term contracts, often providing income for life. |
| Liquidity | Funds are usually locked in for the term length, and early withdrawal may result in penalties. 1 | Can have surrender periods and penalties for early withdrawals, but the structure often varies depending on the type of annuity. |
| Tax treatment | Typically subject to tax on the interest earned in the year it is paid. 1 | May offer tax-deferred growth, meaning that earnings are not taxed until they are withdrawn. |
| Flexibility | Have a fixed term and interest rate. 1 | Can offer flexibility with additional riders that can adjust the income or payout terms based on the annuitant’s needs. |
| Where to purchase | Typically offered by banks or credit unions. 1 | Generally purchased through insurance companies often with the help of a financial professional who can assist in selecting the right type of annuity based on specific retirement goals. |
When making a plan to save for retirement, knowing the differences between an annuity and a CD can help you decide which may be better for reaching your long-term financial goals.
Advantages of using CDs for retirement
CDs can offer predictable returns and are federally insured. They typically do not experience the same volatility as the stock market. Securing a CDs fixed rate during periods of high interest rates could provide consistent returns over several years. Furthermore, CDs may be a suitable option for preserving additional cash reserves beyond emergency savings, potentially offering higher yields compared to other bank accounts.
When Are CDs a Good Investment?
FAQ
Is it better to put money in a 401k or CD?
Second, your 401(k) offers tax-deferred growth. Your money will grow faster in a 401(k) than in a taxable account, like a certificate of deposit (CD), where you have to pay taxes on your earnings every year.
How much does a $100,000 CD make in a year?
A $100,000 Certificate of Deposit (CD) can earn varying amounts in a year, depending on the annual percentage yield (APY) of the specific CD. For example, with a rate of 4. 25%, a CD would earn $4,250 in interest over one year, but national average rates are lower.
What is the downside of a CD?
The main problems with Certificates of Deposit (CDs) are that they are hard to get money out of and may charge fees if you take it out early. They also have fixed interest rates that could lose value over time due to inflation, lower possible returns compared to investments in the market, and possible minimum deposit requirements.
What if I put $20,000 in a CD for 5 years?
Putting $20,000 into a 5-year CD will earn you interest over that term, with the total amount depending entirely on the CD’s Annual Percentage Yield (APY). For example, a 5-year CD at a 3. 50% APY would earn you approximately $3,754 in interest over five years, resulting in a total of $23,754, while a 4. 75% APY CD would yield about $5,223 in interest, for a total of $25,223.
Should you buy a CD If You’re Near or in retirement?
If you’re near or in retirement, you might wonder if CDs fit there too. For risk-averse folks, CDs can be appealing. Safety is very important to them: CDs offer steady returns, are backed by federal deposit insurance, and don’t change value a lot like stocks do.
Are CDs a good investment?
“CDs play an important role as an emergency fund supplement in retirement,” says Daniel Masuda Lehrman, certified financial planner and founder of Masuda Lehrman Wealth in Honolulu. Having a CD’s fixed rate during a high-rate environment can mean steady, solid returns for years. But in exchange, you lose access to funds for the term.
Should you buy a CD or a certificate of deposit?
Certificates of deposit work as a short-term savings vehicle for goals such as upcoming home or car purchases. If you’re near or in retirement, you might wonder if CDs fit there too. For risk-averse folks, CDs can be appealing.
Can you invest IRA funds in CDs?
An IRA gives you valuable tax advantages when you invest in securities like stocks, bonds and mutual funds—and it’s not tethered to an employer, like other retirement plans. You might not know it, but you can also invest IRA funds in certificates of deposit (CDs). An IRA CD is an individual retirement account that holds certificates of deposit.
What is an IRA CD?
An IRA CD is an individual retirement account that holds certificates of deposit. Everyone from financial behemoths like Fidelity and Vanguard to your local bank or credit union offers IRA CDs. Let’s take a look at the pros and cons of investing IRA retirement funds in CDs. How Do IRA CDs Work?
What are the pros and cons of IRA CDs?
We asked financial experts for their take on the pros and cons of IRA CDs—here’s what they had to say. The biggest advantages of IRA CDs are low risk and flexibility for delivering short-term cash flow when you need it most, just before and just after retirement.