So what are annuities?  They are products that take the form of insurance contracts.  How do they work?  Essentially, the investor gives an up front amount or periodic payments to the insurance company.  In return for the payment/s, the insurance company allocates the investor an income.  The income can be deferred, start immediately, be paid out in intervals (e.g., monthly) or even be assigned in one lump sum; there’s a lot of flexibility regarding distribution.

Annuities fall in to two categories: fixed and variable.  Let’s briefly look at both.

• Fixed Annuity.  Fixed annuities have a type of certainty attached to them in the respect the investor has a firm grasp on both the minimum interest rate and the dollar amount he or she will receive.  In this situation, the insurance company makes the investment decisions.  Fixed annuities are often referred to as guaranteed because the insurance company assures the investor he or she will be paid a fixed income independent of asset performance.

• Variable Annuity.  Variable annuities differ from their fixed brethren in that the investor makes the decision where to put the money: mutual funds are a common choice.  Because the investor is in control, the insurance company does not guarantee the income amount.  Because of this, income varies, often dictated by how well the investment is performing.

Okay, what’s appealing about annuities?  Well, they’re certainly not for everyone.  However, for the right individuals (e.g., those who has the cash to invest), they have benefits; in particular, they allow for money to be tax deferred.  Therefore, the payment the investors put in, and the interest that accumulates, need not be declared to the IRS until an income is drawn.  By that time (typically retirement age), people are usually in a lower tax bracket.

And negatives?  There are a few.

1. Annual fees.  Fees can be high, mainly in variable annuities.
2. Commissions.  Brokers authorized to sell these products generally make a healthy commission.
3. Surrender penalties.  An investor who wishes to cash out of the investment, especially if the decision takes place shortly following the product purchase, will face substantial charges to do so.

This all sounds confusing?  It can be.  A trusted financial advisor or investment expert should be consulted before an investment of this nature is made.  Next week we will look a little more closely at annuity income and an optional attachment available on some annuity products called Guaranteed Lifetime Income Rider (what?).  Until then, though, think spring!

So what are some mutual fund positives?

1. A specialized individual follows the investments (so you don’t have to).
2. Not a lot of money is needed to get into some funds.
3. Funds are usually diversified (meaning investments are spread across different companies or areas).
4. Funds are generally easy to get out of should the investment be needed.

With positives, though, usually come some negatives.  Here are a few.

1. Money managers have control, so once an individual chooses a fund, he or she has little say as to where the money is going.
2. Fees and/or sales charges sometimes accompany this type of investment.
3. Not all fund managers have the same skill level, so some are better than others.

Are all mutual funds the same?  No, there are different kinds.  A few fund types are listed below:

Growth Funds. These funds focus primarily on companies with the highest promise of upward mobility.

International Funds. This type invests in companies abroad in the hopes of producing growth.

Bond Funds. Often a safer type of fund (at least in the short term), bond funds invest in government, corporate, or municipal bonds.

Index Funds. This type focuses on specific stock indexes, such as the Dow Jones.

Money Market Funds. Although sometimes not producing the highest return rates, Money Market Funds tend to present the safest environment.

So you think you might be interested in a mutual fund?  Well, it is important to do your homework.  Research the fund’s history to better understand its record.  However, just because a fund has made impressive returns in the past year or two, it does not necessarily indicate it will repeat the stellar performance in the next two.

Another thought?  Access data from third-party companies, such as Morningstar, which analyze a medley of investments, mutual funds included.  Such businesses provide comprehensive information concerning market trends and how well specific investments have performed over time.

So, are mutual funds completely safe?  No, similar to other types of investments, they involve some degree of risk.  Nevertheless, they can also produce impressive gains.

Mutual funds are certainly not for everyone, but then again, what is?

• Savings Account-Savings accounts pay specified interest rates, and your money is usually unrestrictedly available.  Credit unions, banks, and savings and loans are three institution examples that offer this type of account.  The money is generally FDIC insured up to $100,000 for a single account and up to $200,000 for a joint account.
• Treasury Bills-Treasury Bills are short term notes you buy from the government.  You can purchase T-Bills from Federal Reserve banks or investment firms.  The bills could be 30 days, 60 days, 90 days, etc., and are guaranteed by the government.  They are bought at a discounted rate, but when they mature, the full amount is paid.  The interest rate is extremely low, but the money is secure.  It’s somewhat similar to placing your cash in a home vault for a specified period of time.
• CD’s-Certificates of Deposit are insured by the FDIC up to $100,000, so this is also a safe option.  Unlike a regular savings account, though, the money is tied up for a specified term (3 months, 6 months, 9 months, etc.).  The more money you put in and the longer the term, usually the higher the interest rate (but this is not a steadfast rule).  At the end of the allotted time, both the original investment and interest can be withdrawn.  It’s important to mention that if the money is taken out before the maturity date, an interest penalty may apply.
• Money Market Funds-Money Market Funds are similar to savings accounts.  However, they generally require a minimum amount, perhaps $1,000, to open the account.  They usually offer a higher interest rate than a regular savings account, but the number of withdrawals per month is limited.  Bank-issued money market funds are FDIC protected up to $100,000 for a single account and up to $200,000 for a joint account.  Investment firm money market funds might not be FDIC insured, so it is always important to check.

Some individuals will leave their investments “as is” until a clearer understanding of current market trends become known.  Others might wish to sacrifice the possibility of higher returns for peace of mind.  If you are concerned about your money, it is always wise to sit down with an investment advisor or bank representative to go over your savings options.