When investors think of ‘safe investments,’ they tend to think of bonds or CDs, which calculate from a pre-determined timeline and interest rates. During a low-interest-rate environment, both provide safety, but not necessarily, the returns investors are seeking. Bonds and CDs have differing benefits and risks despite being viewed by investors as ‘safe.’
A third ‘safe’ interest-bearing alternative is fixed-indexed annuities, which capture the upside of the market while protecting the principal from the downside risk. Before investing in bonds, CDs, or fixed-indexed annuities, the benefits and risks of each should be considered:
Bonds are like a loan to a government or corporation for a set period.
- The higher the bond’s rating, the less likely of default, but pay a lower interest rate.
- Lower rated bonds pay a higher interest rate due to their risk of default.
- When interest rates rise, the bond’s value decreases, creating a loss to the investor when the bond is sold (interest rate risk).
CDs are an exchange of money between an investor and a financial institution. The institution pays the investor interest to use their money to borrow to its customers.
- Are backed by FDIC up to $250,000 so that if the financial institution fails, the investor’s principal returns.
- Are rate sensitive- when interest rates rise, the CD’s rate will not increase but remain the same through the contract?
- Withdrawing the principal out of the CD before maturity results in a penalty the investor must pay to get their money returned.
Fixed-Indexed Annuities have characteristics of both fixed and variable annuities and are a contract between an insurance company and the purchaser. Many indexed annuities have a minimum interest guarantee, and your principal is protected from market volatility, which retirees tend to seek.
- Your principal is protected, and you won’t lose your initial investment or accumulation.
- Grow on a tax-deferred basis.
- The return bases on an index (ex. The S&P 500) which grows the annuity’s value over time.
- Provides a guaranteed lifetime income and protection against longevity risk; you receive annuity payments for life.
In today’s low-interest-rate and volatile market environment, investors seeking safety must consider how any investment fits into their investment strategy. All the above investments offer benefits to the investor. Each has its place in retirement planning, but only if suitable. As well as part of a financial strategy using other types of investments and accounts. Investors should fully understand the risks associated with annuities before purchasing them. If you have any questions about annuities, now is an excellent time for us to visit.
Disclosure: Fixed index annuities are long-term investments and are not a direct or indirect investment in the stock market and while protecting principal against all stock market losses, will in almost all cases earn a lower rate of return than the stock market in positive stock market growth years, meaning you will not receive full stock market participation.
Disclosure: Annuities generally contain fees and charges which include, but are not limited to, surrender charges, administrative fees and for optional contract riders and benefits. Withdrawals and death benefits are subject to income tax. Principal guarantees, lifetime income guarantees, and guaranteed death benefits discussed are backed by the financial strength and claims-paying ability of the issuing insurance company.
As a retirement income specialist and 38-year veteran of the financial services industry, August H. Velten understands what his clients need in order to enjoy a comfortable retirement. Augie is a former instructor for the Life Underwriter Training Council. He once occupied the legislative seat for the Maine Association of Life Insurers. At August H Velten & Associates, we know that it is your retirement, and you should have control over it. We offer our experience and knowledge to help you design a custom strategy for financial independence. Contact us today to schedule an introductory meeting in this Low-Interest-rate Environment!
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