Tips for Conservative Investment Money
Mary called, frantic. "My savings account is paying under 3 percent but, if I lose a penny of this inheritance, I'll lose my mind. Is there something relatively safe that pays more?" This is a common question from more conservative investors.
Here are two options:
Option 1 - Certificates of deposit. Mary knew in general about the guarantees of bank CDs. She was surprised to learn that CDs come from a variety of places, and taking the highest rate for the longest term wasn't always the best strategy.
Tips for buying CDs now: Be sure to check rates at 2 places - local banks or credit unions and nationally offered CDs through a brokerage house. Sometimes a local bank may run a rate special in response to a large business loan. If they can pay CD buyers more and still profit after lending funds to the business, then it's worth dangling that extra incentive out there for CD buyers. At other times, national and/or brokered CDs give a more competitive rate. Also, it may be prudent to stick with a 1-3 year maturity, as rates are likely to rise, allowing quicker reinvestment at the higher rate.
Option 2 - Fixed Annuity. Mary had heard that annuities had higher fees and upon death, her heirs got little. What she didn't know is that she had half the story and many changes have occurred with annuities over the years. There are many types, all used for different purposes. The fixed deferred annuity is the easiest to understand. It is a contract between an individual and an insurance company. Interest earned during the term of the contract is nontaxable if reinvested. Principal is guaranteed by the insurance company. Withdrawals may be subject to income tax and, prior to age 591/2, a 10 percent federal penalty tax may apply. Withdrawals will affect both the account value and death benefit.
"What if the company goes belly up?" Mary recalled hearing about a failed insurance company a decade or two ago. Annuity money is only as safe as the company and the reserves it puts aside by state law. As an Alabama resident, there is an insurance fund set up in case the insurance company failure, but it's still a good idea to look for an A or A+ rated carrier.
Tips for buying annuities now: The rate can be locked in for a period of time or can adjust each year. Since we expect rates to increase, perhaps buying the adjustable one may be the best alternative. Be careful of higher "bonus" rates in the first year, as renewal rates may not be as high in later years. Look for annuities with a shorter surrender charge period (5-8 years) if you are concerned about flexibility. Most offer a 10 percent per year withdrawal. But if most of the money is stuck (not touchable) because of a high surrender penalty, the company can pay you whatever interest it wants when the annuity rate renews each year. And remember, the longer the surrender charge period, the more chance the agent got paid more of a commission....which sometimes means you get paid less in the end.
Here are two options:
Option 1 - Certificates of deposit. Mary knew in general about the guarantees of bank CDs. She was surprised to learn that CDs come from a variety of places, and taking the highest rate for the longest term wasn't always the best strategy.
Tips for buying CDs now: Be sure to check rates at 2 places - local banks or credit unions and nationally offered CDs through a brokerage house. Sometimes a local bank may run a rate special in response to a large business loan. If they can pay CD buyers more and still profit after lending funds to the business, then it's worth dangling that extra incentive out there for CD buyers. At other times, national and/or brokered CDs give a more competitive rate. Also, it may be prudent to stick with a 1-3 year maturity, as rates are likely to rise, allowing quicker reinvestment at the higher rate.
Option 2 - Fixed Annuity. Mary had heard that annuities had higher fees and upon death, her heirs got little. What she didn't know is that she had half the story and many changes have occurred with annuities over the years. There are many types, all used for different purposes. The fixed deferred annuity is the easiest to understand. It is a contract between an individual and an insurance company. Interest earned during the term of the contract is nontaxable if reinvested. Principal is guaranteed by the insurance company. Withdrawals may be subject to income tax and, prior to age 591/2, a 10 percent federal penalty tax may apply. Withdrawals will affect both the account value and death benefit.
"What if the company goes belly up?" Mary recalled hearing about a failed insurance company a decade or two ago. Annuity money is only as safe as the company and the reserves it puts aside by state law. As an Alabama resident, there is an insurance fund set up in case the insurance company failure, but it's still a good idea to look for an A or A+ rated carrier.
Tips for buying annuities now: The rate can be locked in for a period of time or can adjust each year. Since we expect rates to increase, perhaps buying the adjustable one may be the best alternative. Be careful of higher "bonus" rates in the first year, as renewal rates may not be as high in later years. Look for annuities with a shorter surrender charge period (5-8 years) if you are concerned about flexibility. Most offer a 10 percent per year withdrawal. But if most of the money is stuck (not touchable) because of a high surrender penalty, the company can pay you whatever interest it wants when the annuity rate renews each year. And remember, the longer the surrender charge period, the more chance the agent got paid more of a commission....which sometimes means you get paid less in the end.
posted by Shari Burnum @ 12:14 PM
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