If you are a conservative investor, you do have better places to put your money besides under your mattress or in the bottom of your sock drawer. Two common options include the certificate of deposit and the fixed annuity. These two products offer many similarities as well as some significant differences, but both will leave you plenty of room to expand your sock collection.
A certificate of deposti, or CD, is typically sold by banks. With CDs you invest a sum of money for a relatively short amount of time, which can range from six months to several years. At the end of the period, the CD "matures" and you receive your original investment plus a predetermined amount of interest. Fixed annuities are most commonly sold by insurance companies and are often used to help fund retirement. You pay the insurer a regular monthly installment, and your money earns a fixed interest rate that could change after an initial guarantee period. At the end of the investment period, you can receive your money in a lump sum or choose from a variety of payment options.
One major difference between a fixed annuity and a CD is that the interest on the annuity grows on a tax-deferred basis, meaning you pay no taxes on it until you begin to receive it, which is usually in retirement when you might be in a lower tax bracket. With the CD, you pay taxes on the interest in the tax year it is earned. Thus, the fixed annuity may be the better option if tax considerations are important to you.
Although interest rates on CDs and fixed annuities are relatively low, both are considered to be safe investments. CDs sold by banks are insured up to $250,000 by the Federal Deposit Insurance Corporation. While fixed annuities do not offer insurance protection, they do feature a guaranteed minimum interest rate. However, it's a good idea to determine the financial strength of the prospective insurer, which you can find in financial publications such as Moody's and A.M. Best.
Neither the CD nor the fixed annuity offers a high level of liquidity, which is your ability to have access to your money. If you choose to cash in your CD prior to the maturity date, expect to pay a penalty equivalent to 30 days or more of interest. Likewise, if you surrender a fixed annuity early, you will be hit with significant surrender charges, although you might be able to withdraw up to 10 percent of your account value without penalty.
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