Know the Costs of Keeping Your Money Available
Liquidity now or gain higher interest? What's the best time to invest?
As people age, they want to keep their money close at hand, therefore
they make shorter-term investments. But as you know, short-term investments typically
pay a lot less than longer-term investments. This difference is more painful during periods
with low rates because short-term rates are really low.
So instead of keeping your funds in a low-interest account at 2%, what
if you committed to a five-year annuity
at 5.5%? Your first reaction might be, “That’s too long.” But after you understand that you can get your
money out any time, albeit with a surrender charge, you will probably
like these numbers below.
Comparison of 2% liquid account
and five-year annuity with 5% surrender charge at end of year of surrender,
free withdrawals of 10% annually.
The only way you would have lost interest is if you had surrendered
the annuity after the first year. After
the first year, even if you surrender the annuity and pay the surrender
charges, you are still ahead.
A similar analysis could be true when analyzing short-term vs. long-term
bonds. You could find that after
charges or market fluctuations, long-term bonds will provide more income.
The point is to NOT shy away from investments that are longer term in
favor of those with low rates as a way to preserve liquidity.
Note: With tax-deferred investments,
income taxes may be due upon withdrawal of funds. Withdrawals prior to age 59½ are subject to
a 10% penalty. The rate of return
above is hypothetical and does not reflect the return of a particular
investment, and the values shown should not be used
to project future income. This table refers to hypothetical investments
only and is not indicative of a guarantee of any particular investment
results. There are no fees or expenses in the annuity illustrated,
but if they were present, they would reduce
performance. Earnings withdrawn from an annuity are taxed
as ordinary income. Note that many
differences exist between bank deposits and fixed
annuities, such as the FDIC insurance, which applies to bank deposits
but not to annuities. Annuities
may have surrender charges or expenses associated
with them, while bank deposits may have early withdrawal penalties. The
term of annuities can be illiquid and terms often exceed
the terms of bank deposits.
Other investments may also be liquid, and even after their cost of liquidity,
you could still be ahead in your earnings. To find out if you could benefit, please return
the enclosed coupon for an analysis.