“I would like some information on annuities. I’m 60 and just retired from the Philadelphia fire department. I would like to invest about $100,000 into something really safe.”
Safe investments are certainly on the minds of many investors these days. Annuities can certainly provide safety – or not. Annuities come in many flavors. You are starting from the correct approach – getting information. Getting informed about the types of annuities and what they can – and can’t – do for you. The following is intended to be a simple summary not a comprehensive training. Please work with your advisor to obtain all the facts (pros and cons) before you make the decision that is in your best interests.
Fixed Annuities – can provide principal protection and a set rate of interest for their term. Any guarantees you receive will be subject to the claims paying ability of the annuity company.
Fixed Index Annuities – are a variation on the fixed theme. Their principal protection is similar to a fixed, but the interest it pays is based on the performance of one, or more than one, index – normally a stock market index, but there are many. Certainly more complicated. More moving parts. More pros and cons.
Registered Index Linked Annuities – are a form of variable annuity that offer some protections against losses in the stock market. These offer an investor the opportunity to invest in stocks for a longer period of time with some assurances that their losses will be minimized. Certainly more complicated. More moving parts. More pros and cons.
Variable Annuities – are generally not seen as a ‘safe’ investment since they offer investors many of the same exposures to stock risks as they might find in mutual funds and ETFs. Some of that risk can be offset with various riders to provide owners with guaranteed lifetime income or guaranteed death benefits. If these benefits are important to your financial goals they work quite well. If they are not, these are expensive mistakes.
As you see, ‘really safe’ comes in many flavors as well. Take your time. Work with an advisor that can provide you any of these options rather than just one option. Also consider the other investment options that are both safe and not annuities. You may find what you are looking for outside the annuity world.
Don’t be in a hurry. This is a significant amount of money intended to make your decade’s long retirement even better. Give yourself the highest probability of success with information and guidance from an advisor you trust.
“I am 91 years old and recently moved into an assisted living facility. Thinking I will sell the house where I have lived for 68 years in the next year.
I have money invested in several mutual funds, as well as two annuities totaling over $900K (depending on the market). What can you suggest as possible investment for the proceeds from the sale of the house… so it will be safe and perhaps appreciate?
You have a great show… I listen regularly. Thank you so much.”
Thank you for your kind words. And thank you for your thoughtful question.
Safe with appreciation can be found in a number of investment platforms. But . . . those two words can mean different things to different investors. The key factor in deciding where to invest these proceeds will be what role you want these funds to have in your financial picture. The more precise you can be in determining your goals for this money, the most effective an advisor’s recommendations will be as well.
‘Safe’ investments (from money markets and CDs to annuities and structured notes) come with various types and qualities of guarantees. Investment ‘appreciation’ can mean very modest growth (1 or 2%) to high (double digit) returns seen with stocks, real estate, commodities, etc. that are well managed over many years.
An idea you might consider as you explore your options is whether these funds might be best invested with an eye toward your heirs who might be receiving the funds at your passing. For example, if they are your grandchildren, you might want to lean more towards growth than safety. If they are your (retired) children you might lean toward income.
As you have just begun thinking about this sale you have time to explore, consider, and evaluate your many options. Take your time and choose what you feel fits you best.
“I plan to start Social Security soon. My CPA says I need to pay tax on 85 percent of my benefit at a rate of 24 percent. How do I make sure the deduction is taken out each month?”
You are very wise to address the taxation of your social security benefits. Many people are unaware they will be taxed until after their first year of receiving benefits, when they are surprised with a tax bill on April 15th.
The Social Security system allows you to have taxes withheld much in the same way you have from a payroll check. You will instruct them as to the appropriate percentage to be withheld and it will be done automatically from each check for you. This is a much better solution than paying quarterly estimates. Thank your CPA for alerting you to this issue and allowing you to take steps to make this as easy as it can be for you.
“I purchased a PA municipal bond fund with Vanguard last September with the idea of parking some cash for about 5 to 7 years. It looked like a safe investment as it pretty consistently returned 4 or 5 percent the last 10 years but it has lost about 10 percent since. Any idea what gives? I’m leaning on just leaving it there hoping it comes back. Any thoughts?”
This is a very challenging time in the bond market.
Basic bond math tells us that when interest rates rise – bond values drop. Conversely, when interest rates fall – bond values rise. As interest rates have risen significantly in recent months, the value of bonds (and bond funds) have dropped. Your fund has lost 10% of value.
Should you hold on? Probably. But expect a bumpy ride for the next couple of years.
The Federal Reserve has indicated they expect they will need/continue to raise rates over the next couple of years to combat inflation. If that is the case, your fund will continue to drop over that timeframe. Once interest rates level off – or even drop – your fund will have the possibility to return to a more stable, or even increasing, value.
Vanguard has an excellent reputation in the fixed income arena. It sounds like you were planning to keep your principal committed for 5+ years anyway. I believe riding this out is most likely in your best interest.
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