Using Fixed Index Annuities for Non-Qualified Money
Many retirees and pre-retirees hold a significant portion of their savings in non-qualified accounts—such as bank savings accounts, money market accounts, or CDs. While these options are often viewed as “safe,” they can come with hidden drawbacks that may limit long-term financial growth and purchasing power.
Understanding these limitations—and how fixed index annuities can provide an alternative—can help you make more informed decisions about your money.
The Limitations of Traditional Bank Products
Interest earned in bank accounts and CDs is fully taxable as ordinary income in the year it is earned—even if you don’t withdraw it.
This creates two challenges:
- You are paying taxes on money you may not be using
- Your after-tax return is significantly reduced
For example, if a CD earns 4% and you’re in a 25% tax bracket, your effective return drops closer to 3% after taxes. Over time, this can have a meaningful impact on your overall growth.
Rates Are Often Not Competitive
While bank products provide stability, they typically offer lower interest rates, especially over longer periods. This can make it difficult for your money to grow at a pace that supports your long-term retirement needs.
Over the past 30 years, the national average for 1 year CD rates is less than 2%. After paying taxes on that 2% at the end of the year, the net rate of return would be closer 1.5%
Banks are a good place to park emergency funds and small savings. Investors should be very cautious about keep large sums of savings in accounts that do not earn enough interest to keep pace with inflation.
Inflation Risk: The Silent Threat
Inflation reduces the purchasing power of your money over time. If your savings are earning 2–4% but inflation is running at similar or higher levels, your money may not actually be growing in real terms—in fact, it may be losing value.
This is known as Inflationary Risk:
- Your account balance may increase
- But what that money can buy decreases
In other words, what a $100 at the grocery store bought 20 years ago is very different than what $100 buys today. Our money needs to keep pace with the rising cost of goods or our money will lose value over time. This is called Purchasing Power Risk