Mellody's Mail: Safe Investment Choices

— -- Q U E S T I O N: What is the difference between an annuity and a certificate of deposit? I have a small amount of money and am a little confused as to what type of savings I should invest in.

It is the "interest" that leads to the difference in the two types of annuities you might consider. A fixed annuity offers a set interest payment that is readjusted annually. A variable annuity is less conservative because it derives its return from investments in stocks and/or bonds. Of course, with more risk, one can often expect to receive more return over time.

A certificate of deposit, or CD, is very similar to a savings account, except you do not have access to your money for a specific amount of time. CDs "mature" anywhere between three months and five years from the date you make your deposit. The longer the maturity, the higher the interest rate paid. That said, although interest rates paid by CDs are higher than traditional passbook savings accounts, they rarely offer significant gain — especially in today's low-rate environment. For example, the current yield on an average one-year CD is 1.79 percent.

The question remains: Should you invest in an annuity and/or a CD? The answer is maybe. A CD is a very smart investment if you have a defined time span, cannot risk any loss of your initial deposit and know that you will need the money in a specific amount of time. If you withdraw your money early, there are penalties. CDs have no risk and are one of the safest investments around because they are insured by the Federal Deposit Insurance Corp. (FDIC) for as much as $100,000 per account.

An annuity is a good long-term investment choice only if you do not have an employer-sponsored retirement plan — like a 401(k) — or if you have already maxed out your contributions to your 401(k) as well as IRAs and other tax-deferred investment options. In addition, an annuity can provide a guaranteed return and offer protection against market downturns — both of which can be very important factors for those living on a fixed income in retirement. However, that added protection comes at a significant cost. The fees for annuities can be quite a bit higher than popular mutual fund investments.

E-mail Mellody with your personal finance questions.

Mellody Hobson, president of Ariel Capital Management in Chicago, is Good Morning America's personal finance expert. Click here to visit her Web site, ArielMutual Funds.com. Ariel associate Matthew Yale contributedto this report.

It is the "interest" that leads to the difference in the two types of annuities you might consider. A fixed annuity offers a set interest payment that is readjusted annually. A variable annuity is less conservative because it derives its return from investments in stocks and/or bonds. Of course, with more risk, one can often expect to receive more return over time.

A certificate of deposit, or CD, is very similar to a savings account, except you do not have access to your money for a specific amount of time. CDs "mature" anywhere between three months and five years from the date you make your deposit. The longer the maturity, the higher the interest rate paid. That said, although interest rates paid by CDs are higher than traditional passbook savings accounts, they rarely offer significant gain — especially in today's low-rate environment. For example, the current yield on an average one-year CD is 1.79 percent.

The question remains: Should you invest in an annuity and/or a CD? The answer is maybe. A CD is a very smart investment if you have a defined time span, cannot risk any loss of your initial deposit and know that you will need the money in a specific amount of time. If you withdraw your money early, there are penalties. CDs have no risk and are one of the safest investments around because they are insured by the Federal Deposit Insurance Corp. (FDIC) for as much as $100,000 per account.

An annuity is a good long-term investment choice only if you do not have an employer-sponsored retirement plan — like a 401(k) — or if you have already maxed out your contributions to your 401(k) as well as IRAs and other tax-deferred investment options. In addition, an annuity can provide a guaranteed return and offer protection against market downturns — both of which can be very important factors for those living on a fixed income in retirement. However, that added protection comes at a significant cost. The fees for annuities can be quite a bit higher than popular mutual fund investments.

E-mail Mellody with your personal finance questions.

Mellody Hobson, president of Ariel Capital Management in Chicago, is Good Morning America's personal finance expert. Click here to visit her Web site, ArielMutual Funds.com. Ariel associate Matthew Yale contributedto this report.

The question remains: Should you invest in an annuity and/or a CD? The answer is maybe. A CD is a very smart investment if you have a defined time span, cannot risk any loss of your initial deposit and know that you will need the money in a specific amount of time. If you withdraw your money early, there are penalties. CDs have no risk and are one of the safest investments around because they are insured by the Federal Deposit Insurance Corp. (FDIC) for as much as $100,000 per account.

An annuity is a good long-term investment choice only if you do not have an employer-sponsored retirement plan — like a 401(k) — or if you have already maxed out your contributions to your 401(k) as well as IRAs and other tax-deferred investment options. In addition, an annuity can provide a guaranteed return and offer protection against market downturns — both of which can be very important factors for those living on a fixed income in retirement. However, that added protection comes at a significant cost. The fees for annuities can be quite a bit higher than popular mutual fund investments.

E-mail Mellody with your personal finance questions.

Mellody Hobson, president of Ariel Capital Management in Chicago, is Good Morning America's personal finance expert. Click here to visit her Web site, ArielMutual Funds.com. Ariel associate Matthew Yale contributedto this report.

E-mail Mellody with your personal finance questions.

Mellody Hobson, president of Ariel Capital Management in Chicago, is Good Morning America's personal finance expert. Click here to visit her Web site, ArielMutual Funds.com. Ariel associate Matthew Yale contributedto this report.