Tag Archives: Corporate Bonds

Finding Money Safe Havens in the Present Economic Environment

Finding Money Safe Havens in the Present Economic Environment

There is an unbendable and unbreakable law of economics that states that wealth is created in one of only two ways: people working or money working. Many have attempted to break this law, and usually the results have violated both civil and criminal laws. These days, everyone is anxious to put their money in a safe place. This “safe place” would also preferably have low risk, high returns and tax advantages as well as be ready and waiting for them when they retire.

Does such a “safe place” exist? A respected commentator in the sports world says, “Let’s take a look.” It was not too long ago that investors were looking for returns in the 5 – 12% range. Today, those return expectations are greatly diminished, even if the willingness to take on risk has begun to come back.

As of this article, the current interest rate on a ten-year United States Treasury bond is 3.24%. High-quality ten-year municipal bonds are only paying 2.99%. Ten-year corporate bonds at the highest rating level are paying 3.60%. Keep in mind that these variables can change on a daily basis as investors vote their bond holdings up or down in response to political and economic developments, both foreign and domestic.

Meanwhile, certificates of deposit, which were once considered to be the safest of all investments among the older generations, have now sunk considerably in terms of interest payouts. One-year CDs these days are paying roughly 1.50% and five-year CDs maybe 3%. Previously CD investors could expect to see interest rates as high as 4-6% or even higher. What’s more, even to get the highest rates, investors need to park their money for a long time, as one can see in the case of the five-year CD.

So, the basic concerns have really not changed. They are, in no particular order:

– Principal safety

– Return rate

– Liquidity, or access to funds on short notice

– Flexible term, which depends on when the investor wants the money

– Tax-free

– Reliability and trustworthiness

Taking all of these factors into account, is there an investment that can satisfy all of them?

Surprisingly, the answer is yes. It is an instrument known as a fixed annuity. An annuity can guarantee the safety of both the payments and the principal by contract to the policyholder, in addition to guaranteeing that the owner will not outlive his money if he chooses to annuitize the contract. Annuities, in this respect, are unique as financial instruments.

Currently, credited interest paid on an annuity is not taxable until distributed. Unlike CDs, this allows the capital to grow through compound interest without any interference.

There are many annuity programs, such as equity-index annuities, that provide even more benefits like interest rates that are double-tiered, which means that the owner has a guaranteed minimum rate while also being allowed to participate in the stock market’s returns, if any. In the final analysis, annuities can offer investors a better return than most instruments today.

While annuities have always been attractive vehicles since their introduction, in an economic climate such as this, they are even more attractive.

(* Interest data from the WSJ 6/18/2010)

Liquidated earnings are subject to ordinary income tax, may be subject to surrender charges and, if taken prior to age 59 1⁄2, may be subject to a 10% federal income tax penalty.

Guarantees and payment of lifetime income are contingent on the claims paying ability of the issuing insurance company.

Fixed Annuities

Fixed annuities can offer fixed interest rate accumulation and guaranteed income and help maximize the wealth you pass on to your heirs. With an annuity’s fixed rate of return, you can protect your principal and predict your earnings, which are not taxed until you withdraw your money. Fixed annuities are considered to be a more conservative investment option than variable annuities. Funds in fixed annuities grow steadily, and are not subject to downfalls in the stock market. Fixed annuities offer a guaranteed payment, with the payout amount based on the assumed future returns of the investments and the annuitant’s life expectancy. The payment can be fixed for life, or can allow for future increases.

Fixed annuities are regulated by state insurance departments. Fixed annuities are not securities and are not regulated by the SEC. Equity-indexed annuities combine features of traditional insurance products (guaranteed minimum return) and traditional securities (return linked to equity markets). Fixed annuities are designed to provide retirement savings and , at your option, a guaranteed income stream. Most fixed annuities offer a choice of methods to receive income, one of which usually guarantees an income stream for life.

Fixed annuities pay a “fixed” rate of return. The monthly payout is a set amount and is guaranteed. Fixed annuities can potentially pay more than I Bonds, because insurance companies can invest in higher-yielding assets. Insurers’ portfolios that support fixed annuities are primarily invested in publicly-traded and privately-placed corporate bonds and commercial mortgages, which have a higher yield than Treasury securities of comparable maturity. Fixed annuities are designed for long-term investing to help meet retirement and other long-range goals. Fixed annuities are not suitable for short-term goals because substantial tax penalties and early surrender charges may apply if you withdraw your money early.

Fixed annuities are characterized by a minimum interest rate guaranteed by the issuing insurance company. Typically, a minimum annuity benefit is also guaranteed. Fixed Annuities: Fixed annuities are backed by highly rated insurance companies which guarantee your principal amount deposited. Subject to the claims paying ability of the issuing insurance company.) Because you earn compounded interest on the money that would have gone to pay taxes, savings grow faster than they would in a taxable investment at the same rate. Fixed annuities are a way for you to save for your retirement. Basically, it’s a contract between you and an insurance company.

Call Brian to see if a fixed annuity is right for your unique situation call 509-218-7329