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
– 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.