5.5% Guaranteed?


As this magazine issue goes to publication, there is an interesting phenomenon going on with financial markets. In short, they are in a downward spiral and volatility is a certainty.

Yet, the opportunity to preserve your capital has never, ever been better. Take, for example, CDs and T bills, which are at a 20-year high. These are financial instruments which require a little bit of work to acquire, but can preserve your money for short periods of time.

There’s another instrument that sometimes gets a bad name—called an “annuity.”

What’s an annuity? This is an insured financial “bucket” offered by insurance companies, which guarantees a stated rate of return and defers the taxation inside the account (no taxable implications until later) until when you can either take your money at the expiration of the selected period or defer the tax more and roll it to another annuity.

Fixed annuities traditionally pay a higher rate of return than the above products, in exchange for locking up your money for a bit longer—somewhere between two, three, four, or five years. With an annuity, you cannot liquidate your assets without significant penalties, but you typically earn a higher rate of return over shortterm instruments like CD’s.

Fixed annuities are hard to beat for investors looking for safety and yield. They protect principal and outperform other safe investments. In early December, a fixed annuity had a five-year fixed rate of 5.40%, while five-year treasuries paid 4.4%, and the best five-year CD rates were around 4%. That’s a nice improvement with little management and no maintenance—annual statements only.

What’s the catch? None. No fees. No costs. You can use either qualified (pension/IRS) or non-qualified money (your savings) to lock in a guarantee. What’s the current rate? Around 5%—pushing even higher.

Fixed annuities are not to be confused by the various “other” types of annuities, which have names like “Index” and “Variable.” A fixed annuity is a simple instrument. An ideal asset for “some” of your money—the piece of the pie that can’t afford to be lost. And at these rates, that could easily represent a very sizeable part of your investment portfolio depending on your age, risk tolerance, and goals.

What’s the risk? None. Who backs these products? Generally speaking, multi-billion-in-dollar asset insurance companies, with household names you know, with a backstop offered by most states, which also has a guarantee fund to assure any investor if the insurance carrier should ever default.

Who do you love?

Martin Levy, CLU/RHU, is the founder of Corporate Strategies, Inc./CorpStrat, located in Woodland Hills, California, and a 30-year insurance industry veteran and Lifetime Member of the Million Dollar Round Table. Contact: 818.468.0862 Marty@CorpStrat.com