The Problem – Not Enough Savings
Americans are living longer and they also have difficulty saving money. The government helps us save for retirement by requiring everyone who works to contribute to Social Security and also allows tax-deductible contributions to IRAs (subject to limits). According to the Social Security Administration website the money paid to retired families in 1999 was less than one-third of the average income before retirement. Thus, it appears that many Americans will have a greatly reduced standard of living during their retirement years unless they do something about it right now!

The Solution – A Variable Annuity
For most people, because there are eligibility requirements and limits on contributions to alternative investments such as IRAs and pension plans, and mutual fund investments are subject to taxation every year, one of the best solutions to the problem of saving enough money for a comfortable retirement is a variable annuity. Although contributions to annuities are not tax-deductible, the investment earnings accumulate on a tax-deferred basis until funds are withdrawn, at which time the money is taxed at then current ordinary income tax rates. There is no limit on the amounts that can be invested and everyone can participate. Thus, the investment can grow to a very large sum during the accumulation period.

Anyone now aged 40 has 27 years until the normal retirement age and can expect to live for another 23 or more years. Those who are currently only 30 may live to be 100, so their retirement funds need to last for a very long time. Variable Annuities can be started with as little as $250 by anyone who is 18, and regular deposits can and should be made thereafter. Contributions can be invested in a variety of investments, such as domestic or international equities, bonds, or in the money market (T-bills).

Over long periods of time, the historical evidence shows that equities provide the highest returns; for example, during the period 1973-97, the average rate of return on equities was 13%, while on bonds it was 10% and only 7% in the money market. Thus, if someone did start investing at age 40 they could easily have a $1,000,000 by the time they reach retirement age. The annuity can then provide regular payments for life, for life with a certain period of years guaranteed, or even for the joint lives of the spouses. Annuities can be very flexible! When the annuitant dies, there is a death benefit, usually the greater of the original investment or the current value of the account. Thus, a Variable Annuity can be considered as equivalent a mutual fund combined with life insurance into one package.

The Cost – There is no Free Lunch!
The investor has to pay the insurance company for the cost of selling the annuity, setting up the account, collecting and investing the money during the accumulation period, and paying the regular payments during the retirement period. Thus, expenses may seem to be rather high but some or all of these expenses will be required for any kind of portfolio investment (insurance, pension, IRA, annuity, mutual fund, etc.) and in investments that are tax-advantaged they will still be less than the taxes paid on other investments. Portfolio management and administration fees are usually in the range of 2% to 3% of the value of the portfolio and are deducted each year from portfolio income. When transactions are made in the portfolio, brokerage fees are incurred. Depending on the activity in the portfolio, these expenses can sometimes be as high as 8% of the value of the portfolio for actively managed mutual funds; lower for annuities. Some mutual funds can also charge 12(b)-1 fees of up to 1% of portfolio value for advertising and distribution. Thus, for mutual fund investments, the annual expenses can be as high as 10%. Comparable fees for annuities typically are much lower. Sales costs for mutual funds are sometimes as high as 8% or 9% of the amounts invested, but typically less, in the range of 3% to 5%. These costs are called loads and may be front-end (deducted at the start) or back-end (deducted when the investor sells) or both. The investment most nearly comparable to a Variable Annuity is a Roth IRA. The contract with the insurance company provides the discipline that many people need to actually make the payments to build up the retirement fund. This makes it more advantageous than a Roth IRA for them.

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 variable annuity, especially in equities so as to get the maximum growth of the capital.

Eight years ago, John and Natalie Davis of Columbus, Ohio, were newly married with a son and a daughter about to enter their lives. At this point, they were in their 30s and already had a 401K plan set up, but were looking for an investment that could do a little bit more to ensure that they maintained a comfortable retirement many years down the road.

“John’s family had taken great steps to set up their own retirement plan,” said Natalie. “So we really felt like we needed to make sure that our retirements were equally taken care of.”

The Davises consulted a financial advisor who in turn introduced them to the world of annuities. John and Natalie had currently held aggressive investments in the stock market but they were more interested in a lower-yielding and more dependable investment that would secure their retirement funds.

“Our biggest concern was that annuities seemed like such a complicated investment,” said Natalie. “But in the past eight years our annuity has earned almost $40,000 from just a moderate start. We felt much more comfortable when we saw how it was working for us.”

Today, John and Natalie’s retirement plans seem more clear than they ever expected. The Davises know that by investing in a variable annuity their money is growing deferred of any taxes and is insured, too. Most importantly, by setting up their annuity the couple feels more comfortable facing life after their children move away from home.

“Initially I was totally against the idea of putting our money into an annuity. But now I realize how important it was to start investing early,” said Natalie. “It’s great to know that our future is in a safe place. It allows us to focus even more on the future for our children.”

The Davises’ case is just one example of how convenient annuities can be for the investment of retirement savings. In a time during which a growing number of individuals are concerned with how they can guarantee a comfortable retirement, the question of how to invest wisely, now more than ever, is being answered with annuities.

“Within the last two or three years the demand for annuities has been steadily increasing,” said Judd Potts of The Columbus Financial Group.

“Millions of people are choosing to invest in annuities because it’s a tax deferred investment that is designed to provide better income for retirement.”

How does a variable annuity work? Once money is allocated to an annuity, it’s invested into five to 20 subaccounts of stocks or bonds. Much like a mutual fund, an annuity earns the interest from a number of stock or bond portfolios. But unlike a mutual fund, all the gains made through an annuity are tax free until an investor decides to liquidate the account. Money is only taxed as it is withdrawn from the account. Preserving the investment from annual taxes helps an annuity grow at a quicker rate than any other taxable account.

Annuities pay back any time after their investors reach 59 ½ years old. The account may be liquidated in full or in periodic payments. Persons who withdraw from the account before this age usually suffer a surrender charge of six to nine percent of the annuity’s market value. This likely will make a dramatic impact on savings. If an investor expects to draw from his or her account before this age, an annuity is clearly not the right investment for them.

“Along with being a tax deferred investment, annuities are beginning to offer more and more better benefits,” said Christy Bordas, investment consultant at McDonald Investments in Columbus, Ohio.

One such feature available in an annuity is the added death benefit. In a few words this benefit guarantees that upon the death of the investor, his or her beneficiary will receive either the annuity’s market value or at least the amount of the original investment. This is a good feature because annuities do not guarantee financial gain since they rely on the yields of stocks and bonds. So don’t be surprised if your annuity loses money from time to time.

If you’re considering whether an annuity is right for you, keep these points in mind:

• Like a 401K or IRA, annuities defer taxes on your investment until money is withdrawn.
• An annuity account is managed like a mutual fund, but with no fee for switching portfolios.
• Investors will suffer a penalty fee for making withdrawals before the age of 59 ½.

Annuities are very popular due to their extra benefits. But don’t get carried away with annuity “extras.” More insurance benefits usually mean higher fees on the account.

Finally, before going headfirst into any investment, be sure to consult a reliable financial consultant. Word-of-mouth referrals are generally the safest bet when choosing a consultant.

Just about every adult in the 21st century developed world relies upon credit to finance large purchases like houses, cars and even electrical goods. Spreading the cost of payments is the only way we can do it, even if it means paying more money in the long term.

Some loans are offered to everyone, regardless of their credit history. However, these types of loans can be expensive.

But not everyone can actually get a credit card that easily, and often that is where secured credit cards come in. These may be offered to people with a poorer credit history than unsecured credit cards are. That is because the credit companies know they can get their money back on them, as you guarantee your repayments by securing them against some kind of property which you own, such as your house or car. That way, if you default on your credit card debt, the property can be repossessed and become the property of your lender.

That sounds quite bad, but there is a silver lining with secured credit cards. We have already mentioned that these secured credit cards are easier to obtain, even if you have a poor credit history. So that helps some of the poorest people to get purchases such as cars and the latest electrical equipment.

The other good news is that the interest rates are usually quite a bit lower on secured credit cards than they are for other credit cards. That is because the lender is comfortable that they will get heir money back, as they have some of your property as a guarantee of that. So, secured credit cards can work out to be a lot cheaper for you.

However, you may find secured credit cards a little harder to find than the more traditional unsecured credit cards. By n means all credit card companies offer secured credit cards so you would be best advised to go online to a search engine such as Google and search for ‘;secured credit cards’ to find what is available to you. That way you will be able to compare APR rates (Annual Percentage Rates) and know what interest you will have to pay on your credit card bills. Look for the long-term picture, not just great introductory APR deals and you will find yourself the right secured credit card for your borrowing needs.

To learn more about extra credit cards:

By Darrel Richter, Contributing Reporter
If you’re looking to contribute a reasonably large sum of money to someone or some group, a charitable gift annuity may be the best option for you.

A charitable gift annuity combines the ability to contribute to an organization such as a church, hospital, charity, etc., and the ability to receive investment benefits. You would simply make a cash, securities, or property contribution to the organization in exchange for an annuity in your name for the rest of your life.

The first distinct advantage offered by a gift annuity is that annual payments are guaranteed to you for a specific period of time, typically setup throughout your lifetime. But it can be longer.  If you outlive your projected life expectancy (set up in the contract by an agency like the American Council on Gift Annuities), the payments will be taxed. However, you will receive the steady steam of income for a long period of time, which is especially beneficial during retirement.

The timeframe of the annuity’s compensation could be altered to fit a need, depending on a number of factors, such as the age of the investor and to whom the proceeds of the annuity will actually be going. You have some options when it comes to when you can be compensated with the annuity payments. One option is called an “immediate payment,” in which you are paid immediately. The second payout option is the “deferred payout,” in which you may elect to receive payments at some point in the future (usually 5 or more years later but no more than 20 years later).

Secondly, the rate of return for a charitable gift annuity is favorable compared to instruments like certificates of deposits or savings accounts. These rates can earn as high as 12 percent. Your age and your life expectancy typically determine this payout rate.

A third advantage for a gift annuity is the tax benefit(s). Initially, a deduction will be granted to the policyholder in the first year of the contribution. In addition, a portion of the annual annuity income is tax-free. Remember that these payments may last the remainder of your life. Also, if you donate property that appreciates in time, you gain a capital gains tax benefit.

Finally, making a contribution to an organization like a church, school, or charity is an act of kindness. That is why the organization is generous with the rates of return to the investor, especially since funding can be tight for some organizations. So if you’re looking to give a gift to one of these types of groups, perhaps a charitable gift annuity is the best route for you.

There aren’t as many downfalls for a charitable gift annuity. First, as with most investments, there are tax implications. The investor will have to pay taxes on a portion of the payments. This tax is set forth in the contract.

The second question that must be asked is whether the charity or organization will be around for the long haul, especially since you have made a life-long commitment, or more importantly, they have made a life-long commitment to you.

The Salvation Army is an organization that has been granting charitable gift annuities since January 1941 and has never missed a payment. One advantage of contributing to the Salvation Army is the Annuity Reserve account they have in order to cover the payout commitments they undertake. Because the New York State Insurance Department backs them, they are required to maintain the account.

Another such group that welcomes gift annuities is “Focus on the Family”, a non-profit organization that deals with reaching out (via radio, magazine, and worldwide ministries) globally to try to heal and build households. The investor will receive fixed payments for the rest of his/her life in exchange for the gift. Depending on the investor’s age, the payout rate of return can be highly attractive.

So, how do you know if a charitable gift annuity is the right investment or strategy for you? There are many people who wish to donate to a charity but are concerned about maintaining their standard of living, especially during their retirement period when their incomes tend to be more fixed. Hence, they often don’t make large gifts to charities until their death. So, the charitable gift annuity is an option the investor can utilize in order to make the contribution while being able to enjoy the benefits of the investment.

They can provide to both a donor and a charity many important financial planning advantages. You can increase your income while receiving significant tax benefits. The charitable gift annuity is a classic “win-win” situation to both the investor and the charity alike.

Have you just retired? Recently switched jobs? Perhaps you have an existing investment, such as an annuity, that is no longer paying a competitive interest rate or lacks the liquidity you need. Whenever your life and personal needs change, it is a good idea to review your investment portfolio to make sure it is still in line with your financial goals. After all, we’re talking about the money you and your loved ones have to live on.

But don’t worry. Even if you decide that certain investments need to be changed, you have options. You can simply liquidate your investment funds (albeit with tax implications), or you can “rollover” investment funds to a new account altogether. For instance, a new employer will allow you to rollover your 401(k) from your previous employer to the new company’s retirement plan.

You can exercise the second option by taking advantage of a provision in the tax code called a 1035 Exchange that allows you to directly transfer funds from an existing account to a brand new account without triggering a taxable event. There are strict rules you must follow, and you may have to adhere to a waiting period before the rollover can be finalized. A 1035 exchange is not always the simplest of maneuvers, but the advantages it offers may prove worthwhile.

Consider the tax implications if you decide to cash out your annuity contract without using the 1035 exchange. First, you will be hit with a tax on the interest earned immediately upon the withdrawal of the existing contract’s funds (the principle is not taxed). “In addition [to income taxes], prior to the age of 59 ½, there is a 10% IRS penalty on the withdrawn profits,” said Financial Analyst Meg Green of Meg Green and Associates in Miami, Florida. Finally, insurance companies impose surrender charges if you withdraw funds early. So, double check with your company regarding the length of your contract’s surrender charge period.

Also, check with the insurance company about insurance for the annuity. “Due to the nature of the variable annuity, the principle is insured, sometimes at each anniversary date to catch the highest price” (always at the minimal original invested amount less withdrawals). “Caution: look before leaping.” said Green.

However, many investors realize that the tax-free advantage of the 1035 Exchange outweighs potential disadvantages. In fact, the official wording states, “No gain or loss shall be recognized on the exchange” of an annuity (from Title 26, Subtitle A, Chapter 1, Sub Chapter O, Part 3, Section 1035). For example, you may transfer from one annuity to another, from a life insurance contract to another life insurance contract or endowment policy, and from a life insurance contract to an annuity. The one instance in which an exchange like this is not valid is when you exchange your annuity for a life insurance policy. Always remember to completely exchange the existing policy for a new policy and not for cash.

At what point in time should you roll over your annuity account to a new annuity account? Ultimately, this is a personal decision that depends on individual circumstances. For instance, it may make sense to do this when you change jobs, at the time your new company initially allows you to roll over your retirement account.

A 1035 exchange is also a great option if your existing contract’s interest rate is lower than a new, more efficient contract. The rollover option gives you added flexibility in finding an annuity contract with a higher rate of return without worrying about tax implications. Of course, you should check interest rates in a timely manner. And you should always check with your insurance company to determine the penalties or surrender charges imposed for the exchange. Remember that even if your old annuity contract has matured past the surrender charge period, buying a new annuity contract will probably lock you into a new surrender charge period all over again.

Finally, keep in mind that rollovers may not be right for everyone — even if a new product or contract is marketed to you with appealing features. To help you decide whether to take advantage of the 1035 Exchange, consider all the advantages and disadvantages of this maneuver. Also, ask yourself if a 1035 Exchange is in the best interest of your portfolio and your overall retirement plan. But if you decide that the 1035 Exchange is appropriate, you will be able to avoid a taxable event, and thus retain a greater portion of funds in your portfolio.

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.