Guidelines for use with any investment(s): #1 First, and PRIMARY is SAFETY. #2 is YIELD. Interest or earnings growth. #3 is FLEXIBILITY. Can I make periodic deposits/withdrawals of various amounts without incurring serious charges? #4 is LIQUIDITY. Can I withdraw all or a portion at will? - real-estate is a good example - it may be an excellent investment but it is not liquid because, in general, 100% must be liquidated to access any portion. #5 is TAX CONSEQUENCES. Does my account grow in a tax-deferred environment and does it affect my over-all tax liability. The last of these five guidelines constitutes the major difference between leaving your money in bank CD's and repositioning it into accounts that grow on a tax-deferred basis. Many persons do not grasp this huge difference. Read the following two paragraphs carefully for an example of that difference: The interest earned in funds within a deferred annuity is not taxable annually.. This advantage greatly enhances the product's accumulation ability. Interest compounded on interest, unhampered by taxes, accumulates at a greater rate. The earnings and returns that an annuity generates within the contract are fully available for ongoing growth and accumulation, undiminished by taxes. For example, a $100,000 investment in an annuity that nets a constant 6 percent return over 20 years will grow to $320,700. For an investor in the 30 percent tax bracket (combined state and federal), the same 6 percent return on a fully taxable investment is reduced to 4.2 percent after tax. His or her investment will have accumulated to only $227,600 over the same period. That huge difference of $93,100 results from tax deferral. TO RECAP The three important differences between the SPDA (SINGLE PREMIUM DEFERRED ANNUITY) and a bank CD. SPDA's usually pay HIGHER INTEREST RATES than CD's. You may or may not ever decide to "annuitize" it (transfering its value irrevocably to a company in exchange for periodic lifetime payments). A SPDA has tax-deferred growth. The CD's interest is taxed each year as "unearned income". See again the example given above. A CD typically imposes a penalty for withdrawing money prior to maturity; a SPDA may allow you to take out some of the money annually without incurring a fee. Back in the 1980's I began studying financial stuff. I knew that helping others would create a useful business by protecting others from being sold financial stuff that they didn't really understand and would probably have avoided if given accurate information. That is when I ran across a deceitful racket called cash-value life insurance. If you think that these words of mine are too strong review attorney Ralph Nader's sworn statement during a congressional investigation. I placed it at the top of LifeInsuranceBooks.com I wrote the book, FINANCIAL RECOVERY, on that subject in late 1980 and marketed it to life insurance agents. Its impact was gigantic. For anyone curious about that book, I put it, with some updating, online recently at www.wisebird.com I mention the above history because it leads into the hugely important, and often confusing subject of annuities. In the 1980's annuities were less complicated financial products than they have become. We moved cash values from life insurance policies and current life insurance payments (premiums) into accounts that earned considerably higher interest, and that grew tax-deferred. Their values increased far better than offered by bank accounts, including CD's. Leaving it in cash-value life-insurance policies was, of course, out of the question. Those accounts were called annuities. Back then they were quite simple. We could start a saver with as little as $25 a month in a FPA (flexible payment annuity). For a client with $5,000 or more they got a SPDA (single payment deferred annuity) that provided a higher rate of tax deferred interest. Using the "rule of 72" we could illustrate the profound financial improvement at retirement ages when they withdrew funds, selected a periodic payout, or rolled them over (tax-free) into another (higher yielding) annuity account. Since the 1980's annuities have come a long way. Some have a fixed interest growth. The value of others is related to an index in various equities markets. There are other "bells and whistles". These accounts are provided for several investment portfolio scenarios. The following profound changes in recent years have resulted in an ever-widening retirement income gap in the plans of many Americans: Increasing life expectancy Lower income replacement rates provided by Social Security. Entrance of over 76 million baby-boomers into their retirement years. Decline of defined pension plans that guarantee a predetermined retirement income stream. A low interest rate environment that makes it difficult for retirees to generate risk-free income from what they previously considered to be safe investments (CD's and money markets), prompting them to assume greater risks, experiencing the frightening market swings (volatility) posed by equities and the horrifying consequential "sequence of returns" issue. These trends have produced a new retirement reality. Millions of Americans are now responsible for generating their own adequate and sustainable retirement income. Gone are the days when Social Security and an employer-provided pension plan could ensure a comfortable, secure retirement. Today, consumers must shoulder much of the responsibility for managing their own financial futures. They need self-directed options and self-directed ways to accumulate funds for their future and to safely and efficiently distribute those funds during their retirement. For these purposes, the insurance industry offers financial products, annuities. Annuities are unique financial instruments. They provide a way to accumulate funds for the future and then systematically distribute those funds over a given period. Annuity buyers deposit money into the contract, or contracts, in the form of premiums. Insurance company specialists invest these premium dollars, which are then credited with a certain rate of interest earnings, or grow in value in relation to the performance of the investments in which they are deposited. Having one's own assets invested by professionals whose job is to compete with other companies just makes good sense. Because funds accumulate in an annuity on a tax-deferred basis, the account's interest compounds at a greater rate. None of the earnings are taxed away. At a certain point in the contract's life, the insurance company, at the owner's direction, will convert all or a portion of the contract's funds into a series of periodic income payments. These payments are calculated actuarially to extend for a certain number of years or for the owner's lifetime. This is the process of annuitization, applying capital to purchase income. By design, annuities serve as both asset accumulation vehicles and asset distribution vehicles. For this reason, annuities are well suited for retirement planning. Insurance companies guarantee their fixed annuity credited rates. No matter what the insurer earns on the investment of its general account funds, it is contractually obligated to pay the declared interest rate on its fixed annuity products, which is guaranteed to be no less than the minimum rate. For this reason, fixed annuity owners do not bear any investment risk. Their principal is secure, and they are guaranteed at least the contract's minimum rate of return on their invested premiums. Safety is one of the most common reasons why annuity owners purchase their contracts. Indexed annuities also provide for a minimum guaranteed interest rate, which protects the values in the contract against market downturns. At the end of each interest crediting term, the indexed interest or the minimum guaranteed rate, whichever is greater, will be credited to the contract. In this way, an indexed annuity buyer's principal is protected from loss. However, the guaranteed minimum rate for an indexed annuity may be lower than the guaranteed minimum rate that applies to a traditional fixed annuity, and it is common for indexed annuity insurers to apply the guaranteed minimum rate to only a portion of invested premiums, such as 87.5 or 90 percent. One of the benefits of the (nonqualified) annuity is that generally, there is no limit on the amount the owner can contribute to his or her contract. This feature, in conjunction with tax deferral, can make annuities very appealing retirement accumulation products. Annuities come in many different forms and are purchased for many different reasons. The one thing they all have in common, and one of the most significant benefits they offer, is tax deferral. That is, the interest and growth on an annuity's funds accumulate on a tax-deferred basis. As long as these values remain in the contract, they are not subject to tax. Only when earnings are withdrawn or distributed are they taxable. The annuity remains one of the few individual investments a consumer can make outside of a qualified plan that is given this favorable tax treatment. Annuitization is assumed with an immediate annuity. The need or desire for an ongoing income stream is the over-riding reason an immediate annuity is purchased. Annuitizing a deferred annuity is an option; the owner does not have to convert the contract's funds into an income stream. At the annuitization date, or at any point before that date, a deferred annuity owner can cash in all or a portion of the contract and take the accumulated values. Almost all annuities provide for income or withdrawal options from their contracts in a way that does not require or involve annuitization. Perhaps best of all, money earmarked for retirement placed into annuity(s) solves completely the formidable (often irresponsibly undiscussed) sequence of returns problem. Feel free to Call me without obligation. — (click to return to our opening page)