The Problem – What Will You Do For the Rest of Your Life?
Americans are living longer. They also want to retire when they reach the normal retirement age. At that time, they can expect to live for another 20 or 30 years. During many of those years they will be in good health and want to do things that they have been putting off. Many worry that they may not have enough money to live on or that they may live longer than their money lasts. During their working life they worked for money, in retirement they need to have their money working for them.

The Solution – A Retirement Plan
For most people, a retirement plan is a necessity. Such a plan will help them accumulate a retirement nest egg during their working lives and select an appropriate withdrawal strategy for their golden years. Life is often divided into three ages: First, there is preparation. Second, from about age 25 to 67, there is work. Third, from age 67 to about 90 or even 100, is enjoyment of retirement.

The Process
First, estimate the value of the assets that will be needed to provide the income desired during the Third Age by deciding your future lifestyle. Do you want to live in the South during the colder months and in the North during the summer? Do you want to take a cruise around the world? Second, once the goal is established, consider the various means to achieve it: Social Security, Pensions, IRAs, Annuities, Mutual Funds, and Insurance. For most people, it will be necessary to save money regularly during many of the working years. It is never to soon to start!

The Means
Social Security: The government requires those who work to pay into Social Security. Employers are also required to pay. Self-employed people make both payments. When the worker retires, he or she is entitled to a monthly pension. In 2000, the average monthly payment to all retired workers is $804; to aged couples it is $1,348. Could you live on that? Not very likely, is it! So, you need more! It will have to come from your savings.

Pensions: Some people belong to pension plans where they work. Pension plans are of two types: Defined Benefit (DB) and Defined Contribution (DC). In DB plans the payments in retirement are determined by a formula, similar to social security. For example, the formula may be 2% times the number of years of work times the average salary during the last five years of work. Thus, if someone worked 35 years and earned an average salary of $50,000, they would qualify for an annual pension of 70% ($50,000) = $35,000. In a DC plan the worker usually contributes a percentage of pay (such as 6%) and the employer matches it. All the money is invested until the worker retires and the pension is based on the value of the portfolio at that time. It cannot be determined in advance. Pensions of this type are often called 401k plans after the law that created them.

Individual Retirement Accounts: IRAs are a type of DC pension plan that can be set up by an individual subject to limitations specified by legislation. There are 2 basic types: traditional IRAs and the newer Roth IRAs. IRA contributions of $2,000 annually may be tax-deductible when made if the person does not participate in a pension plan at work. Contributions to Roth IRAs are not tax-deductible and are not limited.

Annuities: Annuities are contracts that promise to make periodic payments for some period, such as life, or 20 years. Annuities can be deferred or immediate. Deferred annuities start at some date in the future, such as at retirement age, to provide more income. Investors in deferred annuities make periodic investments to build up the large sum, after which the payments begin. Immediate annuities make payments the following month (or other agreed date) and require a large, one-time investment, such as $100,000. Fixed annuities pay the same amount each month, while variable annuities pay an amount that depends on the investment performance of the investments held by the particular annuity. Thus, a fixed annuity is like a DB pension plan while a variable annuity is like a DC pension plan.

Mutual Funds: There are many thousands of mutual funds available to investors who still have some money to invest. Mutual funds are companies that sell their own shares to the public, and then invest the money in stocks and bonds.

Insurance: There is always a possibility of premature death. During the person’s working life there will be a need for insurance to provide money for the surviving children until they reach maturity or for the widow until she reaches retirement age. The traditional way to estimate how much insurance is needed is to estimate how many years of income support the surviving dependents will need. There are various types of insurance to fulfill this requirement. After retirement, insurance needs will likely change.

The Cost – There is no Free Lunch!
Each of the available means has different costs and benefits. The investor has to decide the appropriate combination of means to be employed.

When Should Someone Invest?
The answer, of course, is right now! Since no one can tell when is the best time to invest, it is whenever you have the money! One should first invest in any plans for which tax-deductible contributions can be made, such as an IRA, 401k, or Keogh, because these types of savings reduce current taxes. Then, any more surplus funds should be invested in a tax- advantaged way, such as in a variable annuity, and especially in equities so as to get the maximum growth of the capital.

“The college annuity is one that many parents and grandparents are utilizing now because they retain control of the funds even after the child is eligible for college,” says June Lynn, an insurance investment specialist for All State. “This is a very good investment option.”

There are several advantages from investing in a college annuity. First, you will receive tax benefits from this type of annuity. You will qualify for an income tax deduction immediately upon your donation (similar to a charitable gift annuity). In addition, you will pay no income taxes on the interest earned from the accumulation of funds in the account. So, in essence, the taxes are deferred.

Second, the beneficiaries do not have the same money restrictions that other investment vehicles have. You can contribute up to $11,000 per year. This is considered a gift. You’ll have to pay taxes on any gift, if the gift is more than $11,000. (Advisors say you can always get around this by having more than one person contribute funds, so no taxes will be incurred.)

Third, you will retain control of the funds forever, even after the child is going to college. For someone with a lot of money to contribute, this is very important. Some grandparents may not trust giving such funds to parents with the thought that the parents may use the money elsewhere.

Fourth, the rate of return is better than other funds, especially taking into account that you will probably have more funds in this type of account than a savings account or a certificate of deposit. So, the interest earned will be much higher, and you won’t have to pay taxes on it until you withdraw the funds.

A bank savings account is a safe investment because the bank does not invest the funds, is backed by the FDIC, and has no age requirements for tax purposes. However, the rate of return is not as generous as an annuity and you would suffer taxes on the interest when it is earned. So, the annuity is the better option. A CD allows you to place a premium in an account for a specified period of time, typically less than five years. Also, the funds are only available at maturity. The investment is taxed in the same year it draws interest, similar to a savings account. However, this is not a long-term investment strategy like the college annuity.
“CD’s and savings accounts aren’t even in the same league because the tax is deferred and the annuity will accommodate more funds than its counterparts. For instance, you can only contribute $2,000 per year in an IRA. College annuities are very good for someone with a lot of money and/or someone with money in an estate. You can take your money out of the estate and transfer it to an annuity, thus escaping the estate tax,” says Lynn.

The college annuity is a valuable investment choice because with the interest that accumulates, the rate of return will likely be greater than another investment strategy that is not taxed on a deferred basis, such as a savings account or a CD.
However, as with all investment options, there are drawbacks to the college annuity. But, these drawbacks can be avoided. First, be careful when the funds are withdrawn. The magical age here is 59 ½. If you completely or partially withdraw funds from the account before you reach age 59 ½, you will incur a 10-percent early withdrawal penalty tax. You may not like the outcome when you add the 10 percent early withdrawal charge to the standard income tax imposed for withdrawing the funds. One way around this situation is to put the policy in an older person’s name, such as a grandparent’s name, so that you can guarantee the policyholder will be over 59 ½ when the funds are taken out.

Another way around the age situation is for you to annuitize the contract over your life expectancy. Instead of withdrawing the funds when your child reaches college age, the contract will become a standard annuity where payments will be made to you over your life expectancy. So, the 59½-age obstacle doesn’t apply in this instance.

Is this investment right for you? There are many factors to consider. Consulting an annuity advisor can help you identify your options as you prepare to fund your child’s educational future.

The holder is also guaranteed a rate of return from the insurance company. This factor makes the indexed annuity similar to the fixed annuity, but the added bonus of stock market capabilities makes this tool much more attractive. Essentially, the investor will make money when the stock market rises, but not lose money when it falls. So, this type of annuity is very safe.

“Equity-indexed annuities are better than having a fixed or a variable annuity because the investor is able to achieve a guaranteed rate of return as well as possible high returns from the stock market,” says Daniel Willis, insurance specialist from Annette Willis Insurance in Miami, Florida.

“Since this type of annuity is tied to the stock market (typically the Standard and Poor’s 500), it is somewhat similar to a mutual fund.” says Willis. “Most managers will invest very conservatively especially if the economy is down, like today’s market.”

The one thing to keep in mind when discussing the stock market’s role in this investment is that you are not investing in individual shares of stocks per se, you own an insurance contract.

There are some complicated parts of the contract that the policyholder needs to understand. First, the insurance company will establish a participation rate (usually a percentage between 60 and 110), which will ultimately determine the interest rate of return. The participation rate may change at the end of the policy term, yearly, or even daily, depending on the contract.
There are many different methods that insurance companies use to calculate the rate of return. As mentioned before, the policyholder is not directly investing in individual shares of stocks, but an overall index, such as the S&P 500. The growth or fall of the entire index will determine the earning potential.

The first type, the Annual Reset method, recalculates the interest rate every year during the contract term.

Essentially, the starting point is reset every year, which will allow the investor to recuperate earnings if the market turns sour.

Thus, this method should perform well in a good economy as well as in a bad economy.

The second method is the High Water Mark method and is calculated by looking at the index at various points during the term. Taking the difference between the starting point and the current rate will net the interest. If the current rate is lower than the starting point, it means the index (or market) has gone down. The insurance company will “look back” over the contract to determine if any interest should be granted to the investor (based on market conditions). If the index has decreased, the investor does not lose money.

The third formula of calculating the rate of return is the daily average method, which as the name suggests, is an average of every single day during the contract year.

Other methods are often used, such as the Point-to-Point method, which calculates the difference in the index from the starting point to the maturity date of the contract. The insurance company will credit insurance accordingly. Another type will measure the growth form the first day of the contract to an average of the final three to six months.

Therefore, there are many types of calculating the rate of return from the index. Become familiar with these by discussing them with a specialist before signing the contract.

Sounds like a simple investment right? Well, there are some disadvantages to the indexed annuity. The first disadvantage is that the indexed annuity is complex, based on the number of factors that are involved, the methods of interest calculation, and the unpredictable stock market.

Second, you may incur surrender charges if you withdraw the earnings before the policy term is complete. This charge is typically a percentage and may be imposed yearly across the length of the term of the policy. This charge is to cover the insurance company in case the market takes a turn for the worse and the policy loses money. However, some contracts will allow you to take out part of your money once or twice during the year.

Third, the contract usually has a vesting schedule, which is the amount of earnings the policyholder receives in case of early withdrawal. The percentage generally rises as the term approaches the end and is always at 100 percent at the end.
Finally, one small factor is the “cap rate”, which is a ceiling, or limit, the amount of growth can be. This is the maximum rate of interest an annuity will earn.

This type of investment is advantageous for someone who is young and willing to allow the earnings to mount for retirement. “If you don’t need the money and are not dependent on it, this is your best bet” says Willis. “Depending on your situation, all of your earning potential may be ahead of you, so leaving it alone is the way to go.”

Although they are considered a low-risk investment, fixed annuities are issued by insurance companies and are not insured by the U.S. government. They are backed in their entirety by the financial strength of the issuing insurance company, regardless of the amount. Before purchasing an annuity however, you should make sure the issuing insurance company is financially sound. You can determine financial stability by requesting the findings of independent rating companies such as Moody’s, A.M. Best, Standard & Poor’s and Fitch.

If you are self-employed, or work at a business with 50 or fewer employees, and don’t have a health plan, you need to know about MSAs. When you consider what they can do and the tax advantages, there is little that can touch them. Medical Savings Accounts have two parts.

First, you contribute to a high deductible health insurance program. Those premiums (after January 1, 1999) are 60% deductible. The highest deductible for singles (meaning the lowest premium) is now $2300 per year, and $4,500 for families. This is the amount you pay per year out of your pocket, or the money in your MSA account, for medical care, before the insurance kicks in (which covers everything from acupuncture to X-rays).

The second part is the MSA account, which is 100% deductible. In this you put up to 65% for singles and 75% for families, of the amount of your deductible. With a $2300 deductible, you can put in $1,495. With a $4,500 deductible, you can put in $3,375. But here is the interesting part. You don’t have to make that MSA contribution until April 14 of the following year. You can invest the MSA contribution in any investment vehicle you wish, including mutual funds, etc. So what happens when you need hospitalization or medical care? You pay for the services out of your pocket or out of the accumulated MSA “savings” account until you reach the deductible portion, and then the insurance takes over, paying the rest. If you don’t use any money out of your MSA savings the amount rolls over to the next year, continuing to be invested and earning as you go. If you use the money in any year before 65 for non-medical purposes, there is a 15% penalty. But after age 65, withdrawls for non-medical purposes is taxable, but no penalty pplies. And assuming you are healthy and don’t use any of your savings (although that is far-fetched), $1,500 per year in tax-advantaged savings could be worth almost $1 million in 25 years, assuming a 10% rate of return. This “super-IRA,” as Forbes calls it, is a lot different than the old Flexible Spending Accounts (FSAs) that many corporations offered. In an FSA, you either “use it or lose it.”

That is not the case with an MSA. Rates for the insurance portion of an MSA are based on geographic location (at least in California), as well as age and smoking status. An example would be a 35 year-old male non-smoker living in Northern California. His rate on the $2,300 deductible policy would be $53 per month (60% deductible), and his MSA savings portion would be $1,495 per year (100% deductible), investible monthly at $124.58, or in a lump sum by April 14 of the next year. Assuming a 28% tax bracket, the monthly premium would cost $44.10 per month after taxes, and the yearly MSA contribution would represent a cost of $1076.40 after-tax. For me, an MSA lets me save in addition to the Self-Employed IRA I already have. In a SEP IRA you can only contribute up to 15% of your profit. With the MSA, I can boost the amount of my savings way beyond that in another tax-advantaged fashion, as well as control the doctors I see and the hospitals I use. I can pay for everything from reading glasses to lead-based paint removal through my MSA. And if medical expenses get really out of hand, like a terminal illness or major disease, my MSA insurance policy pays for it. If you qualify, be sure to get a quote from an MSA agent. Paying your medical costs with pre-tax dollars may be the best step you’ll take since starting your own business.

An immediate annuity provides a secure, stable way to turn your money into retirement income. You give a lump sum of money (called a “premium”) to an insurance company which, in turn, promises to pay you a steady stream of income for as long as you live, or for a period of time you specify. The payments from an immediate annuity are made in periodic (monthly) installments to you, usually within the first year of deposit.

Unlike income from financial products that can fluctuate, annuity income payments are guaranteed for a certain period of time or for your lifetime.

The amount of each payment installment you receive from an immediate annuity is determined by an interest rate (locked in at time of purchase), your life expectancy, and the initial premium payment amount.

An immediate annuity, often called a SPIA (Single Premium Immediate Annuity) is a practical tool for turning a lump sum of cash into a lifetime stream of income. In the “good old days” you would hit retirement age and your company would hand you a watch and promise you a monthly check for the rest of your life. In these days of “defined contribution” plans, 401ks and IRA retirees are essentially told “Here’s your retirement cash, make sure you die before its gone”.

You might have spent your life as an engineer, or a writer, or a factory floor manager, but suddenly you are confronted with the obligation to become an asset manager and investment advisor. In these circumstances, an immediate annuity is an invaluable tool. A SPIA allows you to take a portion of your irreplaceable retirement funds and turn them into a guaranteed payment stream for as long as you (or your spouse) live. Its kind of a build it yourself guaranteed pension.

If a retiree can calculate his core living expenses, compare them to his anticipated social security payments, pensions and other guaranteed lifetime distributions he can identify the anticipated shortfall. Using a SPIA, he can then convert a portion of his retirement savings into a guaranteed monthly payment stream to cover the difference.

Knowing that his monthly nut is covered with guaranteed income, without touching any additional principal in his retirement accounts, our retiree now has the freedom to manage the remaining assets for growth and safety with an idea of protecting against future interest rate risk and market risk.

Understanding Fixed and Variable Annuities
by Alfred Kahl PhD., Independent Financial Consultant

What is an annuity? An annuity is a contract, usually sold by an insurance company, that promises to make periodic payments for some period, such as life, or 20 years. Annuities can be deferred or immediate. Immediate annuities make payments the following month (or other agreed date) and require a large, one-time investment, such as $100,000. Deferred annuities start at some date in the future, such as at age 65 or 67, to coincide with retirement, for example, and provide more income to the annuitant (the one who receives the payments). Investors in deferred annuities make periodic investments to build up the large sum, after which the payments begin. This is a good way to finance the college education of a child or grandchild, for example. However, annuities are most often used for retirement plans.

What is the difference between a fixed annuity and a variable annuity? Fixed annuities pay the same amount each month, while variable annuities pay an amount that depends on the investment performance of the investments held by the particular annuity. Thus, a fixed annuity is like a defined benefit pension plan, such as Social Security, while a variable annuity is like a defined contribution pension plan, such as a 401k.

Why would someone want an annuity?

Tax-Advantaged Investing:
Once funds are invested in an annuity (within a retirement plan, or not) growth of capital, dividends and interest are all tax deferred. Investments into annuities can be either tax deductible or non-tax deductible contributions depending on whether the annuity is within a retirement plan or not. Over a 25-year period, for example, growth of the capital invested can be astonishing!

Tax Treatment of Payments:
Payments from annuities are generally taxable, however, the tax rate depends on the origin of the funds. Distributions from annuities paid for by tax deductible contributions are fully taxable at the recipient’s then current income tax rate. Distributions from annuities paid for by non-tax deductible funds are subject to special treatment because some of the periodic payment is actually a return of capital invested and this is not taxable, just the interest or investment gain portion is taxable at the recipient’s then current income tax rate. Some penalty taxes may be due if payments go to someone less than age 59 1/2 or if someone over 70 1/2 takes less than the amount mandated by IRS. (For more on taxes, see Publication 575 at: http://www.irs.ustreas.gov)

Which is Better – Fixed or Variable?
As always in finance, the answer is that it depends on the purchaser. The key decision variable is whether the annuitant needs or wants a fixed periodic payment. As a general rule, anyone under the age of 60, or anyone needing the tax deferral, should opt for a variable annuity. Generally speaking, only those who really need the fixed income should choose a fixed annuity. There is, however, an interesting investment strategy using a fixed annuity paid for with non-tax deductible funds in which the payments are invested in mutual funds. This is the subject of another article.

Roger Ray of Fremont, Ohio, just bought a fixed annuity. “I need something stable with a decent rate,” he said.

Ray said he’s unhappy with how his stocks have plummeted in recent months, and he just wants something to get him through these uncertain times.

“I’m not going to make a killing off a fixed annuity,” Ray said. “But at least I know I’m not going to lose any more money. Plus my rate is the best I could find out there.”

Let’s face it. The stock market’s fluctuating around the bottom of the barrel, and some bank interest rates are the lowest they’ve been in decades. And while a fixed annuity may be best for Ray, perhaps you’ll want to look at it for yourself, too.

A fixed annuity is one in which an interest rate of return is solidified for a specific number of years. The contract may even be set up for your lifetime, instead of a few years. This is opposed to a variable annuity in which the interest rate of return varies based on the performance of the investments that are chosen by the policyholder. And in uncertain economic times, predicting the future can be tricky.

Ray said when the economy stabilizes and the stock market starts looking up, he may look at cashing in his annuity and putting his money in a higher-yielding account.

Plus, with a fixed annuity, you save yourself money, said Rick Grabowski, an All State agent in Miami, Florida. “The tax benefits are much better for a fixed annuity than for a certificate of deposit plus an annuity can cover the policyholder for life,” he said.
With a certificate of deposit, you must make one payment to buy the CD. You can’t add to your account in a few months.

However, with a fixed annuity, there is no limit to how much you can contribute. You may make either one big payment or smaller ongoing contributions.

You will know for certain the rate of return on the investment from day one of the purchase with your fixed annuity. And as June Lynn, an insurance investment specialist for All State said, “Because annuities offer a guaranteed rate of return, even if the performance of the investment drops to zero, the return is still guaranteed to the policyholder.”

Since the markets are so volatile, having an investment guaranteed makes the policyholder feel safer. A slumping economy may dwindle your earnings down, but a guaranteed rate of return protects you from that danger.

“Because of the current market conditions, more people are turning to annuities because they are safer,” said Lynn. “With the way companies are going under and the lack of certainty in the market, fixed annuities are definitely a way to go.”

Now, something else you need to consider with fixed annuities is how much you’ll have to pay when you sell. And if you’re investing in an annuity for the short-term, you need to do some careful math to make sure it won’t end up costing you money.
There are two ways to handle this “payout phase.” The first is called a deferred annuity, in which the policyholder elects to not touch his earnings until he reaches age 59 1/2. The first advantage to this type of annuity is that taxes are deferred until the money is withdrawn. By the time you reach age 59 1/2, you may be in a lower tax bracket, which means your taxes will be lower at that point. The second benefit is that this is a very good investment option for someone younger who is saving for retirement.

A third plus is that there is no limit to your contribution. This is not the case for a 401K or IRA investment account. Fourth, if the policyholder dies, the policy does not. It goes to straight to the heirs, which is a nice death benefit. Finally, this type of annuity allows the policyholder to receive the earnings (during retirement) either in one big payment or in regular payments. If the payments are taken in installments, the tax liability is stretched out over a number of years.

You may also decide to receive the payments now instead of later by selecting an immediate annuity. With this option, you’ll receive income payments for the rest of your life or for a specified period of time. Therefore, you don’t have to wait to age 59 1/2 to earn income from the annuity.

“The payout phase for an individual will depend on how long he or she has to wait until retirement, says Lynn.” This is a good option for someone who is retiring sooner than later. Thus, a struggling economy will not disrupt your investment. A distinct advantage to this plan is that you are only taxed on the earnings when the income is paid out.

Keep in mind that the IRS inflicts a penalty on you if you withdraw income before you are 59 1/2. If you’ll fit this category, you’ll pay a 10-percent penalty on the income withdrawn. Because the economy is very unstable, leaving your money in this account for the long-term is much safer.

Ray is only in his 20s, but said he bought an immediate annuity. So he’ll start reaping his benefits now and can change his investment when the economy has a brighter outlook.

Equity Indexed Annuities can often be an excellent solution for anyone with long term money to invest, but with a strong need to avoid risk. An Equity Indexed Annuity can help an investor avoid two major risks – The risks of low returns, and the risks of capital loss. Take, for example, the case of Jack and Cindy. Jack is a sixty five year old retiree with $200,000 in retirement funds targeted for long term savings and growth. Jack and Cindy also have a small employer pensions and social security providing for living expense cash flow. Jack and Cindy are likely looking forward to 20 to 40 years of retirement and need to grow their nest egg so that it lasts for decades. It has taken Jack his whole working life to accumulate these funds, and he has no way to replace them if he loses money on a risky investment. On the other hand, if they invest too conservatively and only secure a minimal fixed return, their nest egg won’t grow enough to take care of them in their later years.

An Equity Indexed Annuity (EIA) could be an excellent fit for a family like Jack and Cindy. An Equity Indexed Annuity is an insurance product that credits the owner with income based on the growth of a related stock market index. It is not a mutual fund, and is not considered a “security” because there is no risk of loss to your invested principal. The insurance company promises to absorb any losses in your investment in exchange for keeping some of your investment growth in positive years.

A simple EIA might work like this. Jack and Cindy could purchase an EIA with a Point to Point Crediting method, tied to the S&P 500, with an annual reset, a 7.5% cap, 100% participation rate, no spread, no costs, no fees.

First lets define the terms: Point to Point crediting means that the policy has specific dates where the value of the associated index is verified, and used to credit your account with whatever gains the market index made in that period. There are EIA products that check the market and lock in your gains each month, indexes that check each year, and even products that check once every other year. In Jack and Cindy’s case they chose a policy that checks the market and locks in gains once per year based on the performance of the S&P 500 index.

In our example, Jack and Cindy chose a simple Cap Rate product with no margin and 100% participation. That means that whatever growth the market index shows is directly credited to their account without deduction – up to the first 7.5% in market growth. If the market goes up 3% they get all 3% with no costs or fees. If the market goes up 10%, they go up 7.5%, again with no costs or fees. And if the market drops 20% the carrier absorbs the loss. Even better, that new lower market value becomes Jack and Cindy’s new baseline, and if the market recovers 10% the next year Jack and Cindy would go up an additional 7.5% even though the market hadn’t yet recovered to their original buy-in price. That means that if the market went down 20% and recovered 7% per year for 3 years a mutual fund investor would still be just around breakeven and Jack and Cindy would be up over 20% for the three years. With a simple cap rate product, Jack and Cindy have traded away the highest end of their potential upside (above 7.5% per year) but in exchange, they’ve gained themselves bullet proof insulation against a market contraction.

So, in more general terms, funds that are performance-linked to the S&P 500 stock index, such as equity indexed annuities, are appealing to many people who want to earn competitive rates of return on their investment without market risk.

The first and possibly most-attractive provision of equity index annuities is the no-loss provision, or minimum rate guarantee. This means that once a premium payment has been made or interest has been credited to the account, the account value will never decrease below that amount. This provides safety against the volatility of the market index like the S&P 500.

The next benefit that appeals to many people is interest guarantees. Most policies have a cap (the maximum interest rate that can be credited to a policy in a policy year) and a floor (the minimum interest rate that can be credited in a policy year). The cap rate can vary from no cap to a fixed percentage, but the floor is generally zero. This allows the policyholder to benefit from potentially high returns and be guaranteed at the same time that no money will be lost.

Finally, equity index annuities offer the same benefits as traditional annuities, such as tax-deferred growth and early withdrawal of funds without penalty. This early withdrawal is usually conditioned upon the annuitant’s death or admittance to a nursing home. Guarantees are provided by the issuing insurance company.

Roger Ray of Fremont, Ohio, just bought a fixed annuity. “I need something stable with a decent rate,” he said. Ray said he’s unhappy with how his stocks have plummeted in recent months, and he just wants something to get him through these uncertain times.

“I’m not going to make a killing off a fixed annuity,” Ray said. “But at least I know I’m not going to lose any more money. Plus my rate is the best I could find out there.”

Let’s face it. The stock market’s fluctuating around the bottom of the barrel, and some bank interest rates are the lowest they’ve been in decades. And while a fixed annuity may be best for Ray, perhaps you’ll want to look at it for yourself, too.

A fixed annuity is one in which an interest rate of return is solidified for a specific number of years. The contract may even be set up for your lifetime, instead of a few years. This is opposed to a variable annuity in which the interest rate of return varies based on the performance of the investments that are chosen by the policyholder. And in uncertain economic times, predicting the future can be tricky.

Ray said when the economy stabilizes and the stock market starts looking up, he may look at cashing in his annuity and putting his money in a higher-yielding account.

Plus, with a fixed annuity, you save yourself money, said Rick Grabowski, an All State agent in Miami, Florida. “The tax benefits are much better for a fixed annuity than for a certificate of deposit plus an annuity can cover the policyholder for life,” he said.

With a certificate of deposit, you must make one payment to buy the CD. You can’t add to your account in a few months. However, with a fixed annuity, there is no limit to how much you can contribute. You may make either one big payment or smaller ongoing contributions.

You will know for certain the rate of return on the investment from day one of the purchase with your fixed annuity. And as June Lynn, an insurance investment specialist for All State said, “Because annuities offer a guaranteed rate of return, even if the performance of the investment drops to zero, the return is still guaranteed to the policyholder.”

Since the markets are so volatile, having an investment guaranteed makes the policyholder feel safer. A slumping economy may dwindle your earnings down, but a guaranteed rate of return protects you from that danger.

“Because of the current market conditions, more people are turning to annuities because they are safer,” said Lynn. “With the way companies are going under and the lack of certainty in the market, fixed annuities are definitely a way to go.”

Now, something else you need to consider with fixed annuities is how much you’ll have to pay when you sell. And if you’re investing in an annuity for the short-term, you need to do some careful math to make sure it won’t end up costing you money.

There are two ways to handle this “payout phase.” The first is called a deferred annuity, in which the policyholder elects to not touch his earnings until he reaches age 59 1/2. The first advantage to this type of annuity is that taxes are deferred until the money is withdrawn. By the time you reach age 59 1/2, you may be in a lower tax bracket, which means your taxes will be lower at that point. The second benefit is that this is a very good investment option for someone younger who is saving for retirement. A third plus is that there is no limit to your contribution. This is not the case for a 401K or IRA investment account. Fourth, if the policyholder dies, the policy does not. It goes to straight to the heirs, which is a nice death benefit. Finally, this type of annuity allows the policyholder to receive the earnings (during retirement) either in one big payment or in regular payments. If the payments are taken in installments, the tax liability is stretched out over a number of years.

You may also decide to receive the payments now instead of later by selecting an immediate annuity. With this option, you’ll receive income payments for the rest of your life or for a specified period of time. Therefore, you don’t have to wait to age 59 1/2 to earn income from the annuity.

“The payout phase for an individual will depend on how long he or she has to wait until retirement, says Lynn.” This is a good option for someone who is retiring sooner than later. Thus, a struggling economy will not disrupt your investment. A distinct advantage to this plan is that you are only taxed on the earnings when the income is paid out.

Keep in mind that the IRS inflicts a penalty on you if you withdraw income before you are 59 1/2. If you’ll fit this category, you’ll pay a 10-percent penalty on the income withdrawn. Because the economy is very unstable, leaving your money in this account for the long-term is much safer.

Ray is only in his 20s, but said he bought an immediate annuity. So he’ll start reaping his benefits now and can change his investment when the economy has a brighter outlook.