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 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.

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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.

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Comparison of 2% liquid account and five-year annuity with 5% surrender charge at end of year of surrender, free withdrawals of 10% annually.

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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.

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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.

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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.

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Note: With tax-deferred investments, income taxes may be due upon withdrawal of funds.  Withdrawals prior to age 59˝ 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 Earnings withdrawn from an annuity are taxed as ordinary income.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.

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