Historically speaking, October has been a tumultuous month for the economy. This year will bring the 36th anniversary of Black Monday (October 19, 1987) and the 34th anniversary of the Friday the 13th Mini Crash (1989). While the more recent financial crisis of 2008 played out over several months, much of the action – Lehman Brothers and WaMu bankruptcies, stock market crashes, global panic, bailouts, etc. – all took place during the last half of September and throughout October. We won’t get into the reasons behind these crises, but each had one common result – investors went scrambling for safety.
From Crash to Cash
Looking back to the Black Monday crash when the Dow Jones Industrial Average sank by 22.6%, many found that safety in the form of Certificates of Deposit. Investors withdrew their exposed investments and transferred their money into CDs. With guaranteed interest rates and FDIC backing, CDs were a widely used means of protecting one’s money from market volatility; a fact that remains true today. The return on CDs today is nowhere near what it was 30 years ago. However, things are slowly improving thanks to the recent federal interest rate hikes.
However, due to their low rate of return, CDs, do not hedge well against inflation – at least not when compared to other products, like certain annuities. This is especially true with long-term CDs that many consumers automatically renew out of habit. As a result, consumers may be losing real-world value that could be parlayed into other, more advantaged solutions.
CDs and the Fed
For the first time since 2020, the Fed lowered interest rates and has signaled that more cuts will come. When interest rates drop, CDs are impacted in several ways.
- Lower Yields on New CDs: Financial institutions adjust their CD rates in response to broader interest rate movements. When interest rates drop, the rates on new CDs also decline.
- Attractiveness Compared to Other Investments: Lower CD rates may push some savers to consider other investment vehicles (such as an annuity) in search of higher returns, especially in a low-rate environment where the returns from CDs might not keep pace with inflation.
- Early Withdrawal Penalties: In cases where CD holders wish to withdraw their funds early in search of higher returns elsewhere, they could face penalties, reducing the overall yield on their investment. This can make CDs less appealing when rates are low.
This makes a good argument in favor of replacement over renewal. In these times of uncertainty, your clients’ assets and retirement savings need as much protection as possible. The top-of-mind awareness created by CD Replacement Month is a great opportunity for producers to start the conversation.
To help get the ball rolling, IAMS is now offering our 2024 CD Replacement Kit. The kit includes top MYGA rates and a wealth of marketing materials:
- IAMS’ 2024 Taxable Equivalent Yield chart
- A split-annuity alternative guide and checklist
- CD vs. FIA sales strategies
- SPL sales tips and comparisons
- Client concept guides on Going Broke Safely and Market Loss Recovery
- The 2024 IAMS vs. Barron’s Best Annuities guide
- A prospecting letter, email, and fillable fact-finder
- Refreshed social cards and post copy
Click below to request the kit.
