Are You Using CDs for Retirement Income?

Jan. 04, 2011
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These days, everyone is looking for a safe place to invest their savings, especially retirees. Certificates of Deposit (CDs) are a popular tool since they are federally insured, making them virtually risk free up to a certain dollar level. However, with CDs providing record low interest rates averaging 1.61%¹, retirees hit by record market losses need more than a safe place to store their money. They need a way to generate income they can count on. A New York Life Lifetime Income Annuity² is a low-risk option that might surprise you.

CDs 101
CDs are investments generally offered by banks, credit unions and savings and loan institutions that offer a guaranteed rate of return for a specified period of time. Their terms usually vary between one month and five years and they are meant to be held to maturity. CDs generally offer a higher interest rate than a regular bank account since the funds will be locked in for a specified term. At maturity, CD owners may withdraw their principal and interest or roll it over into another CD.

A Look at the Numbers
To illustrate how a CD works, let’s use this straightforward example: A 65-year old couple³ invests $100,000 in a one-year CD earning 1.61% interest. At the end of the one-year period, they use the earned interest as income, and reinvest their $100,000 original principal into another CD at the same rate. Following this strategy, they generate $1,160 in annual interest income after taxes.

Side–by–Side Comparison Chart: CDs vs. Lifetime Income Annuity

	Certificate of Deposit	Lifetime Income Annuity
Initial Amount	$100,000	$100,000
CD Rate of Return/Annuity Payout Rate	1.61% annually	7.10%
Annual Taxable Interest/Annual Taxable Income	$1,610	$3,103
Tax-Free Income	$0	$3,997
Taxes Owed	$450	$868
After-Tax Income	$1,160	$6,231
		437% More Income!

At the end of the maturity term, the full initial investment amount of the CD, plus interest, becomes available again, whereas with a Lifetime Income Annuity the annual payment each year includes both interest and principal.

Lifetime Income Annuity
Now, let’s see what that same $100,000 can do when put into a New York Life Lifetime Income Annuity. Designed to generate guaranteed income regardless of market fluctuations, the New York Life Lifetime Income Annuity can be held jointly and will provide a payout each year for the lifetime of both spouses.

The same 65-year old couple takes their $100,000 and buys a New York Life Lifetime Income Annuity. Unlike a CD, a the Lifetime Income Annuity generates both taxable and tax-free income, ultimately putting $6,231 in the couple’s pocket every year after taxes – that is 437%⁴ more than they would earn through their CD strategy. And, once they purchase the annuity, they never have to worry about maturity dates or reinvesting the funds at the end of a term.

Throughout the lifetime of both spouses, the Lifetime Income Annuity pays the same annual amount, regardless of the volatility of the market. At the time of the second spouse’s death, if they elected the Cash Refund option, the beneficiaries will receive the difference between the initial premium and what has been already paid out.

A Better Choice
CDs are useful as a way to protect capital for the short term, but they are not competitive income generators. In fact, as inflation rises, CD holders may even experience negative returns if their money is locked into rates that don’t out pace the rate of inflation.

In volatile times, finding a safe place to put retirement savings is important. But, finding a safe place that also maximizes annual income is just plain smart. If guaranteed, life-long income is of interest, a New York Life Lifetime Income Annuity may be worth considering.

¹CD rate of 1.61% is the average one-year yield for CDs as of 2/5/09 according to bankrate.com.

²Issued by New York Life and Annuity Corporation, a wholly owned subsidiary of New York Life Insurance Company.

³Federal and state income tax rate is 28%.

⁴These figures are effective as of February 2009, for non-qualified policies only. Based on a joint life with cash refund income annuity. Rates are subject to change and payout will vary with age and life expectancy. Actual amounts are dependent upon interest rates in effect at time of policy issue. CDs are accumulation vehicles, are FDIC-insured up to $250,000 until December 31, 2009, and have immediate liquidity. New York Life income annuities are payout vehicles, are backed by the claims-paying ability of New York Life Insurance and Annuity Corporation, and may not be surrendered. The payout from New York Life’s Lifetime Income annuity includes both interest and a return of premium. This hypothetical example is for illustrative purposes only.

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