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November 3, 2014 | John Caulfield; excerpted from Thrivent magazine
Retirees consider CD alternatives
Like many retirees, Thrivent members Patricia and Harold Herb worry whether they'll outlive their savings and want to keep their money safe during unpredictable economic times.
With that in mind, Pat, a former bank teller and assistant cashier, and Harold, a former machinist, keep a watchful eye over their investment portfolio.
But when two certificates of deposit (CDs) approached maturity, the couple realized they needed to find out whether CDs were really giving them the best returns. The couple talked with Albert Dailey, their Thrivent Financial representative in Harrisburg, Pennsylvania, about their investment options.
First, Dailey asked how soon they needed access to their money. If they would need cash within six to 18 months, Dailey suggested staying with the CDs, which would offer more liquidity and a guaranteed interest rate over a set amount of time.
But if the Herbs didn't need the money right away, they could they could consider alternatives, such as a fixed annuity, which typically offers a higher interest rate than a CD.
While interest earned on a CD is sometimes taxed automatically each year, the interest earned on a fixed annuity is always tax-deferred until the owner takes the money out.
Fixed annuities do have some restrictions. A fixed annuity has "surrender charges" if you take cash out during a period of time after opening it (can be seven to nine years or longer, depending on the product). However, you can withdraw up to 10% of the annuity's accumulated value each year without surrender charges. However, taxes may apply.
After considering the options, the Herbs opted to cash in their CDs and invest the money in two fixed annuities with a guaranteed fixed interest rate* in the first year. (In subsequent years, the interest rate may change as interest rates fluctuate.)
So far, the Herbs say they're pleased with the returns, which Pat says have been equal to or better than CDs.
"It's a nest egg – money we can draw on later," she says.
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The experience of Pat and Harold Herb may not be representative of the experience of other members. Their story is also not indicative of future performance or success.
Thrivent Financial and its representatives and employees cannot provide legal, accounting, or tax advice or services. Work with your Thrivent Financial representative and, as appropriate, your attorney and tax professional for additional information.
Annuities are intended to be long-term investments, particularly for retirement. Withdrawals will decrease the value of your annuity and subsequently the income you receive. Any withdrawals in excess of 10% may be subject to a surrender charge. The taxable portion of each annuity distribution is subject to income taxation. If a taxpayer is younger than 59½ at the time of distribution, a 10% federal tax penalty will apply to the taxable portion of the distribution unless a penalty-tax exception applies.
* Guarantees are backed by the financial strength and claims-paying ability of Thrivent Financial.