Published in the February 23, 2018 edition
By WILLIAM F. RYAN, Jr., CLU, ChFC
Owner of WFR Financial Planning and Insurance
To best answer that question you will need to ask yourself, “Can I handle the day to day stock market gyrations when they occur?” When I experience account losses can I honestly tell myself to look at the “big picture,” my time horizon and supposed risk tolerance, and accept this as part of what being in the stock market is all about –no risk no reward? Keeping my age in mind, will I have enough time to recoup losses when they happen and believe I can make enough gains over my time horizon to exceed returns I could have made in guaranteed account? Also consider how soon you will need the money you are contemplating investing or saving as that too can be a determining factor.
Age, risk tolerance, time horizon, liquidity and current net worth are all factor into the equation of saving and investing for the future and depending on any given day the answers to many of these questions could be different. Feeling good today about yesterday’s gains in the stock market might lull “savers” into accepting a greater amount of risk, and likewise, a string of down days in the market may sway “investors” from their feeling about their acceptable level of risk. True investors should stay the course and keep their funds in the stock market and savers should be steadfast in their convictions and place their money in guaranteed products like certificates of deposit (C.D.) and/or tax deferred fixed annuities
A Certificate of Deposit (CD) is a financial instrument offered by banks, a time-savings vehicle for those who have money to deposit and wish to take advantage of its benefits; an interest -bearing account generally earning greater than a money market account, principal guaranteed by the F.D.I.C. (Federal Deposit Insurance Company) up to $250,000. Certificates of Deposit may be issued in denominations of $1,000 or more and for a period of: 3, 6, or 9 months or 1, 2, or 5 years, or some other term period. Typically, a penalty may be levied upon early termination. Unless used as an Individual Retirement Account (IRA) funding vehicle and deferred, interest earned in a non-IRA C.D. is taxed yearly as ordinary income.
A tax deferred fixed annuity is a financial instrument issued by a life insurance company and provides the following benefits; principal and interest guaranteed by the issuing life insurance company, tax deferral of interest not withdrawn and a beneficiary designation to assist in avoiding probate. Fixed annuities are generally issued for and have interest rate guarantees for 3, 5, or 7 years and may be held much longer, even up to a person’s age 90 or 95. Annuities also come with a guaranteed “floor” rate which the insurance company cannot go below; generally, .05% or 1%. Annuities may assess a “contingent deferred sales charge” or (CDSC), as its penalty for early withdrawal. This charge, which in most cases declines from 7% year 1 to 0% by end of year 3,5, or 6, depending on the contract, comes into play only when a contract is surrendered early or on withdrawal amounts that exceed 10% of the account value each year. So, “savers,” when you think of long term tax deferred savings, think of an annuity. Because this type of tax deferred savings account is thought of as being a long-term investment it may be used in an IRA account or non-IRA account geared for retirement and withdrawals are taxed as ordinary income. Other features of a fixed annuity, like safety of principal, the ability to provide a guaranteed lifetime stream of income and market risk avoidance should be the overriding thoughts when deciding on a fixed annuity for your IRA account.
When your earnings are not taxed your money can grow faster. Let’s take a look at the taxable equivalent yield for someone in the 28% federal income tax bracket and a 5.3% Mass State tax. For example, the after-tax return on an account earning 3% equals 2%. In other words, an investment would have to earn 4.5% to equal a 3% after tax return for this Massachusetts resident. Given these financial times, greater risk may have to be assumed if seeking loftier rates and it may be a harder task to find a CD than a fixed annuity offering a 3% or better rate today.
If you are looking for a monthly income, a fixed annuity may be a good choice. You can instruct the insurance company to pay you a monthly income payment based on a variety of options. Here are a few for consideration: interest only or interest of a level fixed amount less than the interest earned. Either of these two methods will help keep your principal turning out income. You could also choose to annuitize your annuity, that is, to take an income stream for a certain amount, time-period or over your life expectancy which will distribute interest and principal to you. This last method could help reduce the tax payment on the income stream.
How can an annuity help me with my Medicare planning? Money placed in a fixed annuity can easily be converted into an income stream to assist the remaining spouse in the house to maintain a standard of living and may aid by saving more assets for the spouse and the estate.
One final point: let your needs drive the selection. Whether you are looking for the short term liquidity of a certificate of deposit or the longer-term tax deferral of a fixed annuity, follow the need. At WFR Financial Planning and Insurance, I can help you satisfy the level of safety and liquidity you need for your money with a wide range of products and services. Remember, solving problems and creating opportunities is how I help business owners, individuals, families and executives realize their dreams.
William F. Ryan, Jr., CLU, ChFC, the owner of WFR Financial Planning and Insurance, located at 653 Main Street, Melrose, can be contacted by telephone, 781-662-4848, or email, wryan@jhnetwork.com for questions, concerns or to schedule a complimentary initial interview.
The information presented is not intended as tax, legal or financial advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek such advice from professional advisors. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.
Registered Representative/Securities and Investment Advisory Services offered through Signator Investors, Inc., Member FINRA, SIPC, a Registered Investment Advisor. WFR Financial Planning and Insurance is independent of Signator Investors, Inc.
