Annuity vs CD Guide: Income, Legacy & the Crossover

The short version

At the defaults in the Annuity vs CD Calculator: Income at 65 | Bright Side Kit — $100,000 at 65, a single male, a $701-a-month SPIA quote, and a top 5.00% five-year CD — the annuity pays $8,412 a year for life and the CD pays $5,000 a year with the principal preserved: the annuity wins $3,412 a year of income. But the annuity starts $100,000 behind on total value, because the $100,000 is gone as capital, and it closes the gap at $3,412 a year — $100,000 divided by $3,412 is 29.3 years, or age 94.3. Before that age the CD is ahead; after it, the annuity pulls ahead for life.

How each one works

A single-premium immediate annuity, or SPIA, is a contract with an insurance company. You hand over $100,000 once, and the insurer sends you a fixed monthly check for the rest of your life. The check never stops, because the insurer pools your premium with thousands of other buyers: those who die early leave unspent premium in the pool, and that money subsidizes the checks of those who live long. Those are mortality credits — the annuity’s whole edge, and no bond or CD can copy them. The price is permanence: once the free-look window closes, the decision is irrevocable, and the $100,000 is gone as capital. A certificate of deposit is the opposite shape: you lend $100,000 to a bank for five years at 5.00%, the bank pays $5,000 a year of interest and returns the $100,000 at maturity. It is FDIC-insured to $250,000. The CD keeps your liquidity and your legacy; the annuity keeps nothing but the check.

The income math, in plain words

The SPIA check is $701 a month: $701 times 12 is $8,412 a year, and $8,412 divided by the $100,000 premium is the payout rate, 8.41%. That is an income rate, not a return — part of every check is your own principal coming back, and over 11.9 years the annuity has handed you your $100,000 back, one $701 check at a time. The CD is simpler: $100,000 times 5.00% is $5,000 a year of interest, and the $100,000 stays yours. The gap is $3,412 a year to the annuity, every year you are alive.

The crossover: 29.3 years, or age 94.3

Total value is where the CD fights back. After 10 years the annuity has paid $84,120, while the CD is worth $150,000 — ahead by $65,880. After 20 years the annuity has paid $168,240 and the CD is worth $200,000 — ahead by $31,760, closing by $3,412 a year. The crossover is where the two lines meet: the annuity starts $100,000 behind and gains $3,412 a year, so $100,000 divided by $3,412 is 29.3 years, or age 94.3. Live past 94.3 and the annuity has paid out more in total. Die at 80 and the math reverses: the annuity paid $126,180 and stopped, while the CD is worth $175,000 and passes to your heirs.

Every branch, checked

Waiting to 70 raises the quote to $771 a month, or $9,252 a year (9.25%): the gap grows to $4,252 a year and the crossover shortens to 23.5 years, or age 93.5. A joint-life contract for a couple both aged 65 pays $622 a month, or $7,464 a year (7.46%): the gap shrinks to $2,464 a year and the crossover stretches to 40.6 years, or age 105.6. The survivor benefit costs $948 a year. A cheaper CD changes the answer too: at 4.75%, the Barclays five-year rate, the CD pays $4,750 a year, the gap grows to $3,662 a year, and the crossover shortens to 27.3 years, or age 92.3. And the spend-down branch answers the fairest question: what if you spend the CD’s principal too? Amortizing $100,000 over 20 years at 5.00% pays $659.96 a month, or $7,919.47 a year. Against that, the annuity wins by only $492.53 a year, and both leave zero legacy.

Taxes: the exclusion ratio vs yearly interest

With a non-qualified annuity — bought with after-tax money — the IRS applies an exclusion ratio: part of each check is a tax-free return of your own principal until your life expectancy, and only the interest slice is taxed. After life expectancy the checks are fully taxable. Fund the same annuity from an IRA and 100% of each check is ordinary income, with no exclusion at all. The CD’s interest is taxed every year it is earned, even if you reinvest it. So in the early years the annuity’s after-tax income is often higher than the $3,412 pre-tax gap suggests, and in the later years it can be lower, once the exclusion ratio runs out.

Three mistakes that skew the decision

Mistake one: calling the 8.41% a return. It is an income rate — interest plus your own principal plus mortality credits. The honest comparison is $8,412 a year for life against $5,000 a year plus the principal back, and then the crossover at age 94.3. Mistake two: forgetting the insurer can fail. CDs are FDIC-insured to $250,000; annuities are not. They are backed by state guaranty associations, typically around $250,000 of annuity present value, with the cap varying by state. Above the cap, split the premium across two or three A-rated carriers. Mistake three: annuitizing everything. Annuitize enough to cover non-negotiable spending — the gap Social Security and any pension leave — and keep the rest liquid for emergencies, inflation, and legacy. Many retirees split it, 40 to 50% into the annuity for the guaranteed floor and the rest into CDs for flexibility.

When each one wins

Pick the annuity if you need guaranteed income you cannot outlive, if longevity runs in your family, and if you can live without the $100,000 as capital. Pick the CD if you want the principal back, if you expect to need the money for emergencies or a legacy, or if your health makes living past 94 unlikely. Pick the joint annuity if the survivor’s income matters more than the $948 a year it costs. Pick the hybrid — half and half — if you cannot decide: the annuity half buys the floor, the CD half buys the freedom.

Verdict

Default to the annuity for income and to the CD for legacy — and if you must pick one, pick by the age you expect to reach. The annuity pays $8,412 a year against the CD’s $5,000, a gap of $3,412 a year while you are alive, and it only wins on total value if you live past 94.3. The CD is ahead by $65,880 after 10 years and $31,760 after 20, and it hands your heirs $100,000 whenever you die. Check your own numbers in the Annuity vs CD Calculator: Income at 65 | Bright Side Kit first — and get competing quotes before you sign anything, because the spread between carriers runs about 17% on the same contract.