With rates so low, are CDs worth it in 2021?

Certificates of deposit, or CDs, may be lesser-known to the average American than a bank savings account, but this type of interest-bearing account is no less important than other parts of your financial portfolio. However, as the coronavirus continues to send shockwaves through financial markets and the economy, many savers are wondering what to do with their low-yielding CDs.

n as a result. However, if you withdraw principal from a CD early, you will incur fees.

Asher Rogovy, chief investment officer of Magnifina, acknowledges that every investment has its own “risk/reward trade-off,” but still sees plenty of merit in CDs to house your hard-earned dollars despite the fact they currently earn historically low interest rates.

“CDs are a single step up from savings accounts in terms of both risk and reward,” he says. “The increased risk is because a CD must be held to its maturity, whereas savings accounts allow withdrawals at any time.” The reward? A CD, which pays higher interest, will help you earn more on your money.

CD rates are declining

CD rates are impacted by interest rate moves by the Federal Reserve. And since the U.S. central bank’s key rate has been pegged at zero percent since March 2020 in an effort to stimulate the economy during the COVID-19 crisis, CD rates are low.

“The Federal Reserve uses the target interest rate for overnight interbank lending as a tool to manage the economy and keep unemployment in check,” says Steve Sexton, financial consultant and CEO of Sexton Advisory Group. “Consumer financial products like credit cards, mortgages, saving accounts and CDs are directly influenced by the Federal Reserve interest rate target.”

While homeowners are rejoicing over record-low refinance rates, savers have instead watched their would-be profits on their cash savings dwindle as CD rates plummeted.

The best yield on a one-year CD is currently 0.80 percent, according to Bankrate. The top rate for a five-year CD is 1.25 percent. And average CD yields are much lower.

“For many financial institutions,” Sexton explains, “interest paid to CD holders is looked upon as an expense. With banks and credit unions currently going through a period of financial stress, we’re seeing CD rates (lowered) to reduce margin pressure and stress on the loan portfolio.”

CD and savings rates could remain at historic lows “for the foreseeable future,” Sexton says.

“Low-rate environments are difficult for conservative savers looking for yield,” says Paul Weaver, founder of The Income Finder. “CDs are a favorite vehicle for those not interested in the risk of investing in stocks and bonds. Unfortunately, CD rates have continued to decline just as overall rates have.”

These ultra-low rates may  stick around for a while, according to Weaver. “The Fed has indicated they plan to keep interest rates low for the near to mid-term future,” he says. “Rate hikes aren’t expected until 2022 at the earliest.”

It’s enough to make one rethink their use of CDs, but there are still times when a CD can be the most appropriate product for your financial needs.

Situations when a CD still makes sense

With low rates expected to continue, it could be the right time to seize upon a CD if you’re looking for a low-risk investment that pays more interest than a savings account.

Security

“CDs are widely recognized as one of the safest investments,” says Rogovy of Magnifina. They are insured by the FDIC, which eliminates the risk of losing money if the financial institution fails.

Guy Baker, founder of Wealth Teams Alliance and author of  The Great Wealth Erosion, agrees. “CDs are typically used by investors who want liquidity and safety in the short run,” he says. “For instance, they may have just sold a building or a business and are wary of deploying their gains right away into a new investment. They often want a safe place to park the money until they decide their next financial move.”

Short-term needs

CDs can be a fantastic option if you’re looking to fill a short-term need — especially if you happen to benefit from pre-pandemic rates.

While most CDs earn less than the current rate of inflation, they’re still a safe place to park money.

“CDs are still a great place for short-term protected savings with the funds to be utilized in three, six or nine months,” Sexton says. “If you’re locked in a long-term CD before rates fell in March 2020, you could be in good shape for awhile.”

Retirement investing

Howard says that CDs can be beneficial as a retirement investment solution for risk-averse investors because it offers greater peace of mind than you may find with other types of financial investments, such as stocks which have the potential to earn higher returns but can suffer losses due to market fluctuations.

“If you’re retired, looking for yield and cannot sleep when investing in stocks and bonds, then CDs are your best option,” Howard says. “It’s best to ladder your CDs to reduce interest rate risk. That means choosing (CDs with) different terms, so your CDs mature at different times.”

Situations when a CD doesn’t make sense

Although beneficial for some, there are some financial scenarios where CDs don’t make a lot of sense.

Dr. Baker cites a number of situations in which a CD may not be appropriate:

• Long-term investing

• Low rates

• High inflation possibilities

Long-term gains

Money that you don’t need for a very long period of time, such as retirement savings that won’t be needed for decades, is best invested in assets with more growth potential. Dvorkin does not recommend CDs for those whose goal is to generate bigger gains on their holdings.

Inflation

The rate of inflation has a huge impact on how successful CDs will be for you. The reason: your money will lose purchasing power if the amount of money you earn on your CD is less than the rate of inflation.

“Neither CDs nor savings accounts are good investments when interest rates are lower than inflation,” Rogovy says. “Today, inflation risk significantly outweighs credit risk, and most investors should look at securities with more upside potential than CDs.”

With inflation so heavily tipping the scales, it’s critical that investors and savers consider looking for investments earning more than the rate of inflation.

Emergency savings

Your emergency fund is money that you need to gain access to at any time without paying a penalty. That’s why CDs, which require you to lock up your money for a specified period of time and have early-withdrawal penalties, might not be a great choice for your rainy-day fund.

“There’s not a strong reason to lock your money into a CD when the rate the bank pays is only nominally higher than the rate you would be receiving in a savings or money market account,” says Matt Stratman, financial adviser for Western International Securities.  “Until rates go up, it makes more sense keeping your money liquid in case of emergencies.”

Instead, he offers a suggestion. “Any amount more than an emergency reserve shouldn’t be sitting in the bank earning close to 0 percent. You should aim to outpace inflation with your long-term money.”

To accomplish this, he recommends other financial vehicles that are better suited to this goal. This includes products like bonds, TIPS, annuities, and other alternatives that give better returns than CDs.

“CD’s typically offer lower rates than investing in stocks and bonds,” says The Income Finder’s Weaver. “Based on historical returns, you’re better off investing your money in the market. If you’re younger or still working, CD’s are not your best option for returns.”

Alternatives to CDs in 2021

Sexton offers a few scenarios for alternatives that are appropriate for 2021 investing::

• Fixed annuities

Sexton says an option is fixed annuities “with one-year term rates as high as 1.5 percent and five-year rates as high as 3 percent.”

• Retirement investing

“If you are looking for a retirement vehicle with better returns that are principal-protected, consider fixed indexed annuities,” he advises. “Depending on how close or far you are to retirement, you might consider shifting to funds with riskier assets, like stocks, bonds and real estate investment trust.” Fixed indexed annuities invest in more growth-oriented investments but offer downside protection.

“Depending upon your long-term strategy, investment goals and risk tolerance, bonds can provide higher yields,” says Sexton. “Real estate investment trusts could provide predictable income, and stocks may give you better returns, but all have much more risk.”

Bottom line

With coronavirus still in full force, it may be a while before rates increase again, making the timing less-than-ideal for those interested in a new CD.

“If you have saving accounts, money market accounts or are renewing your CD, it doesn’t make sense to lock in rates that are at historic lows,” says Sexton.

There’s hope for the future, though.

Howard of SeaCure Advisors reminds us of the support that’s already come from Congress and the Federal Reserve, saying, “These institutions want businesses and consumers to have resources available to hire and retain employees, invest in new equipment, buy goods and overall contribute to economic growth.”

As life slowly adjusts to a new normal, it’s important to remember that you still have options when it comes to your finances.

As Sexton reminds us, “You don’t have any control over interest rates, but you have the power to make smart choices about investing your hard-earned money.”

Learn more:

• CD rates forecast for 2021

• Bankrate’s best banks and credit unions of 2021

• Best 1-year CD rates

Here are 21 ways to reduce debt, build an emergency fund in 2021

Start the countdown: A new year is fast approaching. So now is the time to hatch a plan to get your personal finances back on track. Think of 2021 as a fresh start to solve your money worries.

Here are 21 tips – or must-do "money" resolutions for the New Year– to help you trim your debt and build up that crucial emergency savings fund in 2021.

Since most people need a substantial amount of money set aside to help ride out an unexpected financial setback, we'll kick off this list of advice with some money-saving tips recommended by financial planners and advisors:

Money-saving tips

• Cut back on spending.

Just like slimming down your waist size is good for your health, trimming the fat in your monthly budget is a good way to bolster the health of your emergency fund. (Your goal? Build up six months of living expenses.)

But like a diet, that takes discipline.

Worried about another recession?:Here's what the stock market is predicting for 2021

Retirees:The IRS doesn't care about required minimum distributions in 2020, but it will in 2021

"Review every expense that you have and ask yourself, 'Can I eliminate or reduce some of my expenses,' " says Philip Palumbo, founder and CEO of Palumbo Wealth Management. His pet spending peeve: dining out or ordering in. "It can add up quickly," he says.

• Pay yourself first.

When payday comes, dollars tend to disappear quickly. So put your savings on autopilot. Set up automatic deposits that move money directly from your paycheck to your savings account, says Diahann Lassus, president of Lassus Wherley, part of Peapack Private Wealth Management. "Pay yourself first, before those dollars have a chance to disappear," Lassus says.

• Rid yourself of "recurring" charges.

Scrutinize your credit card statement and identify and cancel any "recurring charges" for services you no longer use, such as magazine or video streaming subscriptions or weight-loss programs, says Cathy Curtis, founder and CEO of Curtis Financial Planning.

• Increase your insurance deductibles.

If you can afford the higher out-of-pocket costs in the event of a claim, consider increasing the deductible on your home and auto insurance policies. "Raising your auto insurance deductible from $500 to $1,000 can save you 13% on your auto premium," says John Campbell, senior VP and senior wealth strategist at U.S. Bank Private Wealth Management. You can also save money by bundling policies, or having a number of different types of insurance policies, such as homeowners and auto, at the same carrier, he adds. It doesn't hurt to shop around for a better deal around renewal time, either.

• Save your raise or bonus.

A windfall, such as a pay raise or bonus, is great. But if you spend it all, it's not so great for your savings account. The fix? Don't adjust your spending upwards to match your higher income stream, says Jeremy Staadeker, founding partner at The Staadeker Wealth Management Group. "When receiving a salary increase or other windfall consider prioritizing saving or paying down debt," he says.

• Don't wait till you have zero debt to save.

While debt is no doubt a bad four-letter word, putting off saving until you are debt-free is a mistake, says Matt Nadeau, a wealth adviser at Piershale Financial Group. Putting off saving, he says, means investors miss out on a key component of saving: time. Over time, your money has the ability to earn interest on prior interest, a concept known as compounding. Similarly, if you pay off debt instead of investing in your 401(k), you could also miss out on the matching employer contributions. "That's free money," Nadeau says.

•Save on stay-at-home.

Pandemic-related stay-at-home orders and related increases in the number of people working from home has resulted in many expenses that no longer need to be paid. For example, if you're no longer paying commuting expenses or for meals out or for your annual overseas vacation, funnel those one-time expenses into savings, says Jeffrey Corliss, managing director and partner at RDM Financial Group at Hightower.

• Adjust your paycheck withholding.

If you regularly get a tax refund from the IRS, that's better than owing. But it also means you're having too much of your pay withheld from your paycheck to cover your tax burden. You can increase your cash flow by adjusting your tax withholding to ensure that you’re not having more taken out of each check for taxes than necessary, says Michael DiNuzzo, a financial advisor at DiNuzzo Wealth Management.

• Save anywhere you can.

Every quarter or dollar or $20 you can save, no matter where you can find the savings, can add up fast, says Cynthia Pruemm, founder and CEO of SIS Financial Group. Consider enrolling in a program like Acorns, which sweeps your spare change on debit or credit card transactions into a savings account. Or save on shopping by making your purchases on online sites like Rakuten and Ibotta, which give you refunds for shopping at their sites. You can also spend less by replacing a pricey cable TV service for a cheaper streaming service like Roku, Pruemm says. "Saving money each month can be easier than you think," she says.

• Refinance your home.

If you haven't taken advantage of record-low mortgage rates, consider refinancing your home loan to a lower rate, says Ryan Graham, senior financial adviser at Altfest Personal Wealth Management. "Even a 1% reduction in your interest rate can result in very material interest savings over the life of your mortgage," he says. A $250,000, 30-year-fixed home loan at 4.25% will cost you $1,230 in principal and interest each month. But you'll pay just $1,088 a month, saving $142 per payment, if you refinance to a 30-year loan at 3.25%.

• Spend less than you make.

This tip is basic math: If you spend less than you take home each month in pay, you'll be able to save more, says Jonathan Howard, a financial advisor with SeaCure Advisors. "The single most important aspect of financial security is spending less than you make," says Howard. "It is also one of the only wealth-building strategies that is entirely within your control."

• Downsize your possessions.

Purging isn't only a way to get rid of things cluttering up your life, but also a way to raise some cash, says Melody Juge, founder of Life Income Management. "Even if you plan to stay in your current home, do a room-by-room purging," Juge says. "Have a garage sale and use the money to (boost) your emergency fund."

• Don't buy the latest gadget.

Buying the hottest new smartphone or electronic gadget might give you bragging rights, but it will also dent your wallet, says Nolan Baker, founder of America's Retirement Headquarters. "A cellphone or computer two or three models older than the latest version can be 70% cheaper and still a major upgrade" over what you have, Baker says. Shop online for the best deals, he says. Apple’s website is offering the new iPhone 12 Pro at $999, but Walmart is advertising an iPhone 8 for $248.99, or roughly 75% less.

• Buy used wheels.

One way to reduce your monthly bills is to shrink your auto payment, Palumbo says. That means steering away from buying a new vehicle, which loses 20% to 30% of its value in year one, or not leasing a vehicle that forces you to get a new lease when the current term ends. Buying a used car is the better deal, Palumbo says. "Consider purchasing a car that is two to three years old and financing it at low rates."

Tips to pay down debt

• Put a 'warning label' on your credit card.

A few years back, Lassus gave clients stickers to put on their credit cards that read, "Caution: May be hazardous to your wealth." Keeping the risks of credit cards front and center is the best way to control spending, she says. "Think before you charge," Lassus says.

• Avoid budget-busting spending.

Paring down debt is about controlling costs. But you can't control spending impulses if there's no budget to benchmark your spending against, says Staadeker. Create a budget. And then monitor it every few months so you can "identify opportunities to control costs and increase savings."

• Prioritize debt repayment.

The only way to lower debt is to pay off existing debts. "Develop a plan to pay down the debt," Staadeker says. Dialing back credit card debt with sky-high interest rates should be at the top of your to-do list. One strategy, Staadeker recommends, is paying down debts with the highest interest rate first. That way you’ll pay less in interest. "Once these are paid off, move down the ladder to the next most expensive debt," he says. Another strategy is to pay off your smallest debts first, so you get a feeling of accomplishment and get more motivated to knock out other debts.

• Consolidate your debt.

If you're paying off credit cards and other loans and debt each month, you might be able to consolidate all those debts into a single loan with a lower monthly payment. Debt consolidation loans often come with fixed interest rates that are lower than borrowing costs on other debt. Rolling a number of debts into a single payment can save you on interest, and also provide additional cash flow each month to pay down other debt.

• Take advantage of 0% credit cards.

With the average interest rate on credit cards close to 18%, according to WalletHub, you could save money on interest by taking advantage of 0% introductory credit card offers, Pruemm says. "That way, your entire payment is going to principal (or the amount you owe) instead of principal and interest," Pruemm says. Let's say you have $2,000 in credit card debt. At 18%, you'll pay $360 a year in interest. With a 0% rate for 12 months, you will pay $0 in interest.

• Designate 2021 debt-free zone.

Make a commitment to "avoid incurring new debt in 2021," says John Mantia, co-founder of PARCO (Pensioned Americans Retirement Co.). If you don't take on any new debt this year, and pay down debts you already have, your debt will go down. "If you can focus on living within your means, you’ll essentially 'stop the bleeding,' " Mantia says.

• Start a side hustle.

One way to owe less is to make more money and use the extra cash to knock out those pesky bills. Join the gig economy. Deliver food, rent your home or join a ride-sharing company. "2021 could be the year to start to cultivate a side hustle," says Howard. "Diversification is a buzzword in financial circles. Creating income diversification" is another form of diversification, he adds.

What Is An Immediate Annuity?

An immediate annuity is an investment that turns your current retirement savings into future income payments. When you buy an immediate annuity, you receive guaranteed income payments for a set number of years—or possibly for the rest of your life. Annuities are not for everyone, though. Here’s what you need to know to decide if immediate annuities make sense for your retirement strategy.

How Does an Immediate Annuity Work?

An immediate annuity is designed to provide you with income payments for a set period of time in exchange for an initial lump-sum investment. They’re called “immediate” annuities because you begin receiving annuity income payments almost immediately after you deposit your money .

There are many types of annuity contracts, featuring a wide range of different features and fees. Like immediate annuities, they all aim to help investors create their own retirement paycheck. You provide an upfront investment, and the annuity company guarantees regular income for the life of the contract.

This income guarantee makes annuities an attractive option for some retirement investors, but it comes with its own costs. There are fees to watch out for, and once you’ve purchased an annuity contract it can be expensive to withdraw your principal investment. If you needed to withdraw additional funds beyond your regular annuity payment for a given month or year, you could face high penalties.

This general lack of liquidity means it’s best not to invest all of your savings in an immediate annuity contract.

Immediate vs Deferred Annuity

Broadly speaking, there are two varieties of annuity contract: immediate annuities and deferred annuities. Each type comes with its own annuity income payment schedule.

• With a deferred annuity, you delay income payments for at least a year or longer. This gives the annuity company more time to invest and grow your money, so your future payments will be larger than you would get with the same initial investment in an immediate annuity.

• With an immediate annuity, the income payments begin within a year of purchasing the contract, and many start right after you sign up. Because there is no delay in collecting income, these products can be a good fit for people who are just entering retirement.

“Think of an immediate annuity as a do-it-yourself pension plan,” said Jonathan Howard, a certified financial planner (CFP) with SeaCure Advisors in Kentucky. “Instead of getting it from an employer, you’re getting the pension from a lump sum of money that you give to an insurance company.”

Single Premium Immediate Annuity

Besides payment schedule, immediate annuities differ from deferred annuities in one key way: the time you have to fund the contract. Immediate annuities are generally purchased with a single, lump sum deposit. Because of this funding method, this style of annuity is commonly referred to as a single premium immediate annuity (SPIA). Deferred annuities may also be purchased with a lump sum, though you can fund them incrementally over the years you have before you retire as well.

With immediate annuities, you have to put up the money in this way because in most cases you’re aiming to start collecting income right away. You can fund your SPIA by making a large deposit of cash or by transferring over money from a retirement plan, like a 401(k) or individual retirement account (IRA).

If you don’t need income right away, you might choose to build your savings through a deferred annuity, which you then convert into an immediate annuity when you’re ready to retire.

Types of Immediate Annuities

Immediate annuities companies describe their products a few different ways. It’s important to understand these distinctions because how your immediate annuity is classified ultimately determines what your future payments will be.

First and foremost, most annuities are categorized by the returns they provide. Annuity rate of return is classified one of three ways—variable, fixed and index. Annuities may be further classified by how long their payments last: either over a set term or a lifetime. This means you might have a variable lifetime immediate annuity or a fixed term immediate annuity.

Here’s what each of those classifications means and who might benefit most from each kind of immediate annuity.

Variable Immediate Annuities

You’re probably most familiar with the mechanics powering variable immediate annuities. Variable immediate annuities generally work like investment accounts, like your 401(k) or IRA: You deposit a certain amount and what you earn is based on market performance.

In a variable immediate annuity, your investments are held in subaccounts, which basically work like mutual funds: They invest in groups of assets like stocks, bonds and money market funds. If your investments do well, your monthly payout increases. But if the investments perform poorly, your income payments may decrease. Just like with normal investment accounts, this means you may actually lose money, especially in the short term.

A variable annuity can make sense if you can tolerate some short-term changes in income payouts in exchange for higher growth potential over the longer term. You might also consider a variable annuity contract for the inflation protection they can provide: Market returns have historically greatly exceeded inflation rates and returns of other safer investment vehicles, like certificates of deposit (CDs) and annuity products with more fixed rates of return. Just make sure you have other resources you can use to pay your bills in the event of short-term income drops from down markets.

Fixed Immediate Annuities

Fixed immediate annuities work a lot like CDs. In exchange for a certain upfront payment, your annuity provider agrees to pay you a set income regularly. This effectively removes risk from investing in the annuity, aside from the inherent risk of locking up a chunk of your money. Besides inflation diminishing the value of your funds, this trapping of your assets may also cause problems if you need to withdraw more than is allowed at a given time, a move that may result in penalties.

Your returns in a fixed immediate annuity will also be lower than they might be if you used an annuity whose returns were at least somewhat based on market returns. That said, if you absolutely need a set amount of income and can’t risk any losses, a fixed annuity would be a good choice.

Index Immediate Annuities

Index immediate annuities, also known as fixed index annuities, fall in the middle of variable and fixed annuities. Your payments are tied to some sort of market index, like the S&P 500. When the index does well, you receive a larger payment and when the index doesn’t do well, you receive less.

An index immediate annuity caps both your potential gains and losses, so there is less volatility in your income than you’d have with a variable annuity. As a result, you’ll earn less in good years but make more in bad years compared to a variable immediate annuity. In addition, your losses generally have a floor, meaning you won’t lose any of the initial amount you used to purchase your fixed index annuity.

Term Immediate Annuities

In a term immediate annuity, your payments only last for a set period of time called a term. Terms generally range from five to 20 years, and you can choose an interval that works for you. If you die during the term, the annuity will generally continue making those scheduled payments to your selected heir. Once the term ends, though, the payments stop, even if you’re still alive.

A term immediate annuity can make sense if you only need income for a set period of time. “I find that fixed time period immediate annuities are most commonly used to fund a life insurance policy that requires a fixed funding arraignment,” said Greg Klingler, director of wealth management at the Government Employees’ Benefit Association..

They could also be used to finish paying off your mortgage or to cover your bills until you qualify for other income, like a pension. The logic is you’re covering a temporary need that won’t last your entire life.

Lifetime Immediate Annuities

Alternatively, you could select a lifetime immediate annuity. As you can guess by the name, the payments on these contracts last for your entire life. You could also set up a joint lifetime annuity that spans the lifetimes of two people, like you and your spouse. With joint lifetime annuities, payments continue so long as at least one of you is alive. Because the payments are tied to two lifespans, which increases the likelihood at least one person will live a long time, payments may be lower with joint lifetime annuities than comparable single lifetime annuities.

Whether joint or single, a lifetime immediate annuity can be a good fit for general retirement planning because they assure you’ll always have at least some income as long as you live.

Benefits of Immediate Annuities

• Start receiving money right away. As soon as you purchase an immediate annuity, you can start collecting income payments. There’s no delay between your upfront investment and the return, making it a good choice for people who need money right away.

• Simplicity. Immediate annuities are easy to manage. Unlike other forms of investment income, they require no account monitoring or rebalancing—you just get paid every month, like clockwork.

• Potential for lifetime income. An annuity with lifetime payments is one of the few ways to create a steam of guaranteed income you can’t outlive.

• Protection against market losses. If you set up a fixed or index immediate annuity, the contract protects your income against market losses. You don’t have to worry about losing income during a downturn.

• Customizable. You choose how your annuity is constructed. That goes further than just deciding how much and how long you get paid. You can also pay for additional features, called riders, to add extra benefits like protection against inflation or an inheritance for your heirs.

Disadvantages of Immediate Annuities

• High upfront cost. Since you’re paying off the annuity all at once, you need to have a considerable amount saved up for immediate annuity contracts.

• No control of deposit. Immediate annuities are not liquid. Once the insurance carrier has the money and starts paying you, you no longer have control over the amount you paid for the annuity. If you have an emergency and need to access the funds, it could be expensive to break the contract.

• Potentially lower returns if you die early. If you select a lifetime immediate annuity, the amount you get back depends on how long you live.“This investment option will prove to be very valuable for an investor who outlives his/her peers but will not be advantageous to someone whose lifespan is below average,” said Klingler. “A life-only annuity would provide almost no benefit to an investor who dies shortly after the policy is put into place.” To get around this problem, you could purchase a lifetime annuity with a guaranteed minimum number of payments, so if you die early, your heirs would receive this remaining money

• Payments could lose value from inflation. Since your annuity payments can last years and even decades, inflation could gradually decrease the buying power of your income, especially if you bought a fixed annuity. While variable and fixed index annuities have more short-term risk, they could help grow your future payments to keep up with inflation. If you’re concerned about inflation eating away the value of your annuity payments, you might consider buying a cost of living adjustment rider. With this annuity add-on, your payments start out lower than a comparable policy without the rider but then increase over time to help keep up with inflation.

How to Tell If an Immediate Annuity Is Right for You

If you’re entering retirement and are ready to start tapping into your savings, an immediate annuity could be a good fit. Not only do the payments start right away, it’s one of the few ways to turn your savings into income that you cannot outlive. An immediate annuity can be especially helpful if you do not have any other sources of guaranteed lifetime income, like a pension. “Given that more and more employers are doing away with pensions, protecting against this risk has become increasingly important to retirees,” said Klingler.

On the other hand, if you don’t need income right away, you may be better off continuing to invest your money in the market or through a deferred annuity. And if you do have a pension, you might already have your basic income needs covered so you may not need an annuity on top of it.

If you’re on the fence because you have mixed goals, needing income today as well as growth for the future, one other possibility is to set up a split-funded annuity, which divides your deposit between one account for immediate payments and the rest for deferred growth. For more information and help finding the best annuities for your situation, consider meeting with a financial advisor to discuss whether an immediate annuity is right for you.

What Experts Say 2021 Will Look Like for Your Wallet

2020 has been one for the books, and not for any particularly good reasons. The year kicked off with the Australian wildfires, ushered in the first global pandemic in more than 100 years and plunged millions of Americans into joblessness and poverty. The stock market went haywire and could still crash, more than 4 million acres in California burned to the ground, Supreme Court Associate Justice Ruth Bader Ginsburg passed away and climate change continues to accelerate. Now, as COVID-19 cases spike again, all but canceling the holidays for many, the most vital hope we have revolves around this nightmare year ending. 2021 will have to be better, because it can’t be worse, right?

Perspective: How 2020 Changed the Way We Look At Money

Of course, there’s no way to really know what will happen in the future, but we do have a fair amount of clues as to what we can expect in the new year, at least when it comes to our wallets. GOBankingRates consulted a number of financial experts to learn what 2021 will look like from the perspective of our bank accounts. Though we have some silver linings, like possible student loan forgiveness, we have quite a lot of recovering to do before the pains of 2020 are behind us.

Last updated: Dec. 30, 2020

The Stock Market Will Pick Up

Recent news of high-efficacy COVID-19 vaccines has stimulated the investor appetite. Juan Carlos Cruz, founder of Britewater Financial Group, expects the stock market to continue to rebound in 2021. 

“Stock markets are gaining as we continue to get news of vaccines, which is a sign we are ready to return to business as usual,” Cruz said. “Many investors are buying stocks at reduced prices due to the virus. Buying discounted stocks with the knowledge of what those stock prices can reach is attractive to investors and may be a leading factor in what people will, or have, purchased. We expect to see more of this in 2021.”

People Will Be Forced To Sell Their Homes

“As a home buying company, we have already seen an increase in people needing to sell their homes because they have been in forbearance for months and are now in a place where they can’t pay the lump sum that is coming for all the back due payments when their forbearance ends,” said Erik Wright, owner of New Horizon Home Buyers. “I believe this is just the tip of the iceberg and that we will begin to see a huge increase in foreclosures in the housing market in 2021 as forbearance periods end. Most people who lost jobs during COVID and applied for forbearance will have a hard time paying all those back due mortgage payments as one large payment to get caught up. Unless banks decide to change their strategies and allow people to defer their payments to the back end of their mortgage, many people will have no other choice but to sell or allow the home to go into foreclosure.”

It’s a dismal forecast for many homeowners who have been hit hard by COVID, but it also means that first-time homebuyers could stand a better chance at getting a reasonable price on a house.

Consumer Credit Will Be Harder To Access

“Consumer credit will be even more difficult to access for those with poor credit history, and the number of families with poor credit will increase due to their inability to continue to pay bills on time as a result of the job losses created by COVID-19,” said Marion Mathes, CEO of CreditWorks, adding that banks will further curtail their consumer lending activities due to uncertainty around consumer repayment capacity.

Related: Companies Set To Make the Most Money During the Coronavirus Crisis

There Will Almost Definitely Be Another Stimulus

“Expect another [COVID] relief/stimulus package early in the year,” said Jonathan Howard, CFP and financial advisor with SeaCure Advisors, who adds that it might not be as substantial as what we saw with the CARES Act given the “political meat grinder” that is a potentially bitterly split Senate. But there’s also the possibility that Americans could see a heftier check than the average $1,200 they saw last time. We’ll have to wait and see.

See: The 20 Industries That Will Never Be the Same After the Coronavirus

Healthcare Costs Could Soar

President-elect Joe Biden has a comprehensive healthcare strategy, aiming to fortify and expand the Affordable Care Act, but if the Senate goes Republican (we’ll know in January following the Georgia run-off elections), it’s highly unlikely that Biden will be able to advance his plan much. Even an evenly split Senate could see Biden gridlocked. As such, healthcare costs will probably go up before they go down.

“I think in 2021 we will see a rise in healthcare costs due to the pandemic and with the possibility of some type of single-payer or ‘Medicare for all’ type of coverage to be announced by this new administration, our health insurance premium costs could be affected,” said Sa El, co-founder of Simply Insurance. “Any change probably won’t happen anytime soon so we have to be ready for higher premiums in the near future and maybe much lower rates over the next few years.”

Cruz added that healthcare is infamously tricky and costs “usually climb with inflation, so a good indicator of what may happen is to follow the inflation index. If it climbs, healthcare costs may also climb. If inflation drops, healthcare costs may also drop. Keep in mind this is not a guaranteed way to gauge healthcare costs. There could be an increase [in] costs due to the coronavirus. Hospitalizations are at an all-time high and we are straining our healthcare workers and systems. We may still see a significant increase to healthcare costs no matter what happens to inflation.”

Taxes Are a Wild Card

Biden also has an ambitious plan for tax reform, but just what he gets done there again depends on the Senate.

“Nobody can say for sure what U.S. Fiscal Policy will look like until we know the results of the Georgia Senate special elections. If Democratic candidates Jon Ossoff and Raphael Warnock can defeat Republican incumbents David Perdue and Kelly Loeffler, then the Democrats will have a majority in the Senate and an easier path to pass tax legislation,” said Bennett S. Stein, CPA/ABV, CFP, Arbor Wealth. “If Republicans retain control, the chances of meaningful tax changes are much lower. President-Elect Biden has stated that income, payroll, and capital gains taxes should go up on top earners, but again, so much rides on the Georgia Senate races. However, if you are earning under $400,000 per year, you probably will not incur a substantial tax hit.”

Some Student Loan Debt Could Be Forgiven

Biden has a detailed plan to tackle federal student loan debt, and though many of his moves may be blocked by a Republican or divided Senate, there’s hope that he’ll be able to advance in this area.

“There is talk of possibly forgiving federal student loan debt for people who make less than $125,000 per year for undergraduate debt,” said D. Shane Whitteker, owner and chief broker, Principle Home Mortgage. “This would have a pretty significant impact in my opinion. Student loans are one of the biggest hurdles for many prospective first-time home buyers.”

More From GOBankingRates

• 19 Effective Ways To Tackle Your Budget

• Are You Spending More Than the Average American on 25 Everyday Items?

• 30 Important Money Habits for Your Financial Future

• Guns and 32 Other Things You Definitely Do NOT Need To Buy During the Coronavirus Pandemic

ABOUT THE AUTHOR

Nicole Spector

Nicole Spector is a writer, editor, and author based in Los Angeles by way of Brooklyn. Her work has appeared in Vogue, the Atlantic, Vice, and The New Yorker. She’s a frequent contributor to NBC News and Publishers Weekly. Her 2013 debut novel, “Fifty Shades of Dorian Gray” received laudatory blurbs from the likes of Fred Armisen and Ken Kalfus, and was published in the US, UK, France, and Russia — though nobody knows whatever happened with the Russian edition! She has an affinity for Twitter.

Read More