With stock markets looking shaky, Nashvillians are turning to fixed interest rate products to protect their money.
While experts usually disagree wth such mild mannered investing, many investors are thoroughly satisfied with the old adage "slow and steady wins the race." At this point, they may have the last laugh yet.
If you are looking for some safe money returns, there are three basic investments to consider. All come with a guarantee of principal meaning you cannot lose money. All are insured meaning if something goes unthinkably goes wrong somebody is there to bail you out.
Banks offer savings vehicles that are insured by the FDIC. As much as most of us conisder the FDIC a government entity, in fact, it is nothing more than an inxurance. What makes them different is the fact that they have a guaranteed line of credit with the United States government. Because of that line of credit, the FDIC has far less salted away in reserves than any other insurance company is required by law to keep on hand. At the moment they have less available in reserves as a percentage of insured deposits than at any other time in their history. But... there is always that line of credit. (Must be nice, huh?)
Bank accounts come in a variety of flavors from checking accounts, savings accounts, money market accounts and certificates of deposit. Since we're talking about getting the best rate of return while side-stepping stock market swings, we'll address certificates of deposit, commonly called CD's. CD rates today are at near all-time lows. Five year CD rates are somewhere in the 3% range at local Nashville banks. Shorter term rates are commensurately lower for one and three year CD's respectively.
Unless your bank account is owned by your IRA or other retirement account, expect to get a love note at the end of the year reporting all of your interest to Uncle Sam and giving you the patriotic privelege of paying taxes on every penny you earned. To add insult to injury you owe this tax whether you withdraw the money or leave every penny in the account as you rollover your CD's each time they come due.
The next major category of insured and safe money returns come from the U.S. government itself: government issued bonds. Government bonds carry different names like Treasury Bills (T-Bills) and Treasury Notes according to the length of time before they mature, or stated the other way, how long they last. Bills are the shortest term offering, notes are the mid-term offerings and government bonds are the long term options.
Like bank products bond interest is taxed every year.
Last are insurance products. These most often take the form of cd-like annuities which pay a set rate for a fixed period ranging from 1 to 15 years. The most common are five year accounts which currently offer returns in the 4% range depending on the carrier. Annuities are backed both by the insurance company that issues them but also by state guarantee funds. In Tennessee the state guarantee fund backs up each individual up to $100,000 in the present value of annuities, per company.
Unlike CD's or bonds, annuity interest is not taxed until it is withdrawn. So, if you are the type that rolls your cd over when it comes due and your cd(s) are not owned in your IRA, a fixed annuity could save you some taxes. At the very least you put yourself in control of when you want to pay the taxes.
Because they are issued by the U.S. government they are considered the lowest risk investment available possibly in the entire world. As such, since they are such a sure thing, they pay the lowest interest of any interest earning account. Today they range from less than 1/2% 5%. To get a 5% return on a government bond, you better be pretty young. That 5% is available only on 30 year bonds.
For questions or comments the author can be contacted at iampetew@yahyoo.com or by phone at 615-469-4222.
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