Transfer money from BANK Certificates of Deposit

Call for one on one discussion: Stewart Ogilby (941) 545-3600

Sarasota, Florida — UPDATED 4/14/2023

Every financial product needs to be evaluated in terms of the following: safety, yield, liquidity, flexibility, and tax-consequences. In conjunction with a comprehensive financial plan it must consider one's needs and goals, including the impact of inflation, and income requirements.

What financial vehicles are available to provide the best chance of achieving your financial objectives using low risk and low cost methods? It is imperative to understand certain complex financial products that some contend may actually be designed to be confusing, for marketing purposes. The unfortunate term, "deferred annuity" itself assumes (generaly incorrectly) that the depositor intends to eventually irrevocably transfer their savings to an insurance company, to be returned based on mortality tables that assure corporate profits.

Three important differences between a SPDA (single premium deferred annuity) and a bank CD.

  1. A SPDA may have a higher interest rate than a CD.

  2. A SPDA offers tax-deferred growth. A CD's interest is taxed each year as "unearned income".

  3. A CD typically imposes a penalty for withdrawing money prior to maturity; a SPDA may allow you to take out some of the money annually without incurring a fee.
Under what circumstances do fixed deferred annuities fit into a comprehensive retirement plan? They work best when planning for guaranteed asset growth with maximum safety. If you are considering immediate or near term annuitization (irrevocably turning over your money to a company in exchange for a guaranteed periodic payback of your own money), a step you might live to regret, shop annuities and turn over your money forever in exchange for a contractual promise from a life-insurance company. If that is what you want to do, here is a somewhat over simplified technique for determining whether or not to consider buying an annuity for that purpose. First, total up monthly income that is guaranteed from sources such as pensions and Social Security. Add monthly income you can conservatively estimate from low risk, low volatility investments that have strong audited financial data. For the sake of this brief discussion, we will call this total "projected income". Next, estimate the income you will need monthly in retirement. If the projected income is greater than your needed monthly income then you probably don't need to buy an annuity, or you might consider a small one to insure a guaranteed income and to sleep better.

Comment added post-"covid" economic developments: I am recommending specific insurance company products for SAFETY OF ASSETS. I DO NOT RECOMMEND VARIABLE OR HYBRID ANNUITIES. The market-indexed fixed deferred annuity provides tax-deferred growth. A bank CD is not, in my view, as effectively insured and its interest credited is taxed annually as "unearned income". I suggest that, when placing money into these accounts with life-insurance companies, for liquidity purposes it is better to accept a somewhat lower interest rate on money deposited in exchange for shorter maturity, and/or to acquire several accounts having staggered maturity dates (a strategy frequently applied to CD's).

The unique, important and attractive features of these products are: safety of principal and a choice, to be made in the future, whether or not to contract with a life-insurance company to provide an income that cannot be outlived (annuitization of principal, a choice that may well be unnecessary as well as ill-advised). In depositing any money, the rating of the company accepting it is an important consideration.

As with all financial products, advantages must be weighed against disadvantages and appropriate application must be made in terms of individual financial circumstances. More recent economic and societal changes, especially increased volatility of financial markets as well as increased life span, have moved the focus toward deferred annuities, (rather than to CD's). Salesmen earning their living by selling securities and compensated transactionally have traditionally looked askance at annuities except during market troughs when it is harder to sell the financial products, particularly mutual funds, mandated by their affiliated stock brokers.

Recent times dictate an increased desirability for persons, especially those near or in retirement, to go to persons trained to be fiduciaries for advice and for the positioning of assets that they must rely upon for the rest of their lives. The goals of the game today are low risk, low volatility, and not going backward, along with a high degree of probability of growth during (hopefully) advancing equities markets..

An insurance company's cleverly designed percentage ("roll up") may have been been calculated to create a phantom "account" upon which future income payouts are calculated. Such a percentage may differ substantially from the annual yields before or after exercising any income option. A life insurance company's actuaries are able to project how much THEIR company can affordably pay out of retained principal based on mortality tables. I see no reason for an insurance company to make an annuity's guaranteed lifetime income payout a function of a phantom "account" that contains a "roll-up percentage" as high as 8% or more, other than for marketing purposes.

Too often this numbers game results in salesmen quoting that "roll-up" percentage as the "asset growth" within a deferred annuity. The sales pitch, passed from an insurance company to a distributing FMO and then pitched to gullible insurance salesmen, frequently results in projecting annuity yields higher than those of other investments. The best annuities, as of this writing, may generate a yield (tax-deferred) of 3% to 6% to their depositors.

Life insurance companies invest conservatively, overwhelmingly in intermediate-term bonds. Obviously, they can't pay out higher percentages than they earn. Unfortunately, this fact gets lost, too often, by salesmen pitching annuities. As shown by mathematical annuity analyses, the accumulation growth of these products over time runs roughly between 2% to 5% net of fees, as expected.

Money placed in fixed annuities of top-rated carriers is as safe as anything that can be found and is guaranteed never to go backward. In today's volatile markets they make sense when used as the safest and most secure portion of one's retirement portfolio. How much goes there depends upon individual situations. Understanding this does not, in any way, eliminate the importance of safety and security when positioning other assets that are earmarked for one's future and reducing what we may consider to be unacceptable levels of market risk.

Below are examples of guaranteed tax-deferred yields of three fixed "MYGA's (Multi-Year-Guaranteed_Annuities), deferred annuities as of this writing (Jan. 16, 2023). Carriers are rated A- or better. This is for information only, not a sales solicitation.

* Available 1/18/23.

It is important to know that there are more sophisticated (a nice word for "confusing") deferred annuities, yields of which are "indexed" and related to the performance of a market index such as the annual S&P-500, for example. Returns, during escalating market years can increase. During flat or declining markets, there is a interest "floor" that is guaranteed. There are various indexing methods to choose among (annual point-to-point, for example). These contain a "cap" beyond which yields do not increase regardless of market performance. To place one's assets in such an account makes sense when a "bull" (rising) market is anticipated. These are "bells and whistles" that must not distract an investor's focus from the product's fundamental underlying huge benefit. It is not unusual for stock brokers to denigrate annuities. If you hear such criticism, casually ask about something called "the sequence of returns".

There is nothing wrong with earning a guaranteed yield on a portion of one's assets that will never go backward, and are protected by assets of a huge financially sound insurance company. If you are dealing with an agent or advisor who is touting returns from a fixed annuity, fixed index annuity, or through a fixed annuity's income rider, or "hybrid annuity" that are substantially larger than 4% to 6%, as of this writing, I suggest you ask for that advice in writing.

A fixed annuity, or a fixed-indexed annuity, can provide you safety of principal combined with a guaranteed lifetime income, subject to an insurance company's financial ability to meet its contractual obligations. An annuity hedges longevity risk, the risk that you might outlive your money. That is what annuities are uniquely designed to do with your deposited funds when so instructed (a problematical decision). The companies work from statistical mortality tables, making their annuities rather like the reverse of life-insurance. With both products an insurance company, using statistical averages and large numbers, when managed properly is assured of making large profits. That is why they provide such an attractive place for you to protect you own retirement savings, selecting the appropriate financial products.

Take care when placing funds into a deferred annuity that the contract does not make it mandatory to annuitize your funds at a later date. Annuitization requires turning over your assets, irrevocably, to a company in exchange for periodic payouts for the rest of your life, or for a specified period of time (a choice that, quite likely, might not be in your best interest). However, should you decide to annuitize your contract's accumulated value at a future date, there is no reason that you must do so with the same company in which your assets were deposited and grew in a tax-deferred environment. In fact, you would be wise to shop other selected life-insurance companies' payout contracts to get better returns.

If you have questions, feel free to give me a call: (941) 545-3600


Legal disclaimer: To ensure compliance with requirements imposed by the IRS, we inform you that any advice given is not intended to be used, and shall not be used, for the purposes of avoiding penalties under the applicable revenue codes or for the purpose of marketing or recommending to another person and/or entity any transaction or matter contained herein. We may not and cannot give specific federal or state tax, legal or accounting advice. While we discuss planning in these areas, individuals are expressly and specifically directed to seek and rely only upon the advice of legal counsel or a certified public accountant in regard to the tax or legal aspects of any transactions.

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