With the volatility of the past year and growing uncertainty of the future economy, an increasing number of people are focusing on safe investments.
If that's you, what are your options? Several financial vehicles exist as an alternative to securities. Those are:
Government Treasuries- Widely regarded as the world's safest parking place for cash, US Treasuries meet two needs. Investors need a rock-solid place to put money, and the Government needs cash to spend. Win-win right? As an investor, the yields are usually as low as you'll find but that is the trade-off for the level of safety offered.
Bonds- Corporations need to finance operations as well and bonds are the safest way to invest in the corporate world. Bondholders are the first to be paid in the event of company insolvency. If this happens, the bonds may not be redeemed at full value but it is better than the alternative of owning a stock that falls to $0.
CDs- This is simply a step-up from a savings account at a local bank. An investor agrees to lock the money up for a certain time period. In exchange for the loss of liquidity, the interest rate paid is a little higher and the deposits fall under the banner of FDIC coverage.
Annuities- Annuities are usually favored by investors nearing retirement. Annuities, at their most basic level, exchange cash today for income tomorrow- but there are thousands of different ways companies package this basic premise. Do your homework and don't be sold until you get some Straight Talk!
Annuities have certain advantages over Treasuries and CD's for people looking for safe investments. Annuities can be used for accumulating cash as well as insuring a long-lasting stream of retirement income. Earnings in an Annuity can also grow tax deferred. Finally, the returns on your investment in an annuity contract are based on the performance of an insurance company's investment portfolio. With solid companies, you have some of the best safe investment managers in the world managing your money, and additionally you have very high credit ratings guaranteeing your income long into the future.
Insurance companies own very large blocks of corporate bonds so the return will mirror the yield on bonds, less the operating expenses of the company. The safety of annuity products comes from company reserves that are used to project stable returns and guaranteed minimum interest rates. In addition, as annuities are regulated insurance products, state guaranty funds back each contract to a limit specific to the state you live in.
Each of these safe investments has its place depending on the needs and investment objectives of each individual investor. But for the right people, annuities are superior to the other safe investments listed. Here's why:
Treasuries- An annuity is backed by the reserves of the issuing insurance company, which is in the business of protecting and growing assets. The US Government seems to be in the business of printing and spending money and piling on debt. The failure of this system would have catastrophic global consequences, but we may be racing headlong to that reality right now. It is prudent to hedge your bets and invest with professionals.
Bonds- Annuity rates are based on a bond portfolio but have guaranteed minimums and default protection from the massive reserves that companies must carry. Annuities are simply a safer way to own bonds.
CDs- Certificates of Deposit have only one advantage over annuities: A CD is more liquid, so the money invested can be redeemed in full in a shorter length of time period than with annuities. Besides that, an annuity grows tax deferred and the rate of return is usually twice as high as a CD. For an investor looking for a safe investment lasting five years or more, annuities easily exceed CDs in all categories of benefits.
Each of these points deserves greater explanation which you will find at AnnuityStraightTalk.com but this covers the basics that each investor needs to know to decide if an annuity makes sense.
When making a final decision, competent advice is highly recommended. That presents a unique set of questions and challenges. Educating yourself will allow you to screen the advice you get and make an educated decision regarding your financial future.
Bryan J. Anderson is the Author of The Annuity Report at AnnuityStraightTalk.com, and offers great free resources on How to Chose an Annuity Bryan helps you understand all the complexities of High Yield Safe Investments and Annuity Rates and finds the best combination of safety, flexibility, and profitability for your money.
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