Strategies related to receiving guarantees are important in investing in investment contracts. Investors buy certificates of deposit and bonds with staggered maturity dates, and this practice is referred to as receiving guarantees. One primary reason for doing this is the ability to access funds upon maturity of the certificates of deposit and bonds without incurring surrender charges. There may be another reason to consider receiving guarantees, which is interest rates. No one, not even experts, can accurately predict interest rate movements, so receiving guarantees is a wise and effective way to manage the unknown.
Receiving Guarantees in Investment Contracts
Guarantees can also be received in investment contracts, and those strategies related to receiving guarantees can be used to obtain income or yield. Yield is the return you achieve over time from keeping your money in an investment contract. Receiving certificates of deposit and bonds can be classified as receiving for yield. For investment contracts, you can receive guarantees for yield using fixed contracts, but you can also receive guarantees for income.
Receiving Guarantees in Fixed Insurance Contracts
Fixed insurance contracts, also known as Multi-Year Guaranteed Annuities (MYGAs), work similarly to certificates of deposit. The fixed rate is a guaranteed rate that lasts for a specified period. There are typically no annual fees in fixed contracts, and surrender charges decrease annually over the contract period. The main difference between certificates of deposit and fixed contracts (MYGA) is that interest accrues on a tax-deferred basis in fixed contracts (MYGA). You must pay taxes on the interest each year for certificates of deposit in a non-tax-advantaged account.
For example, if you have $300,000, you could place $100,000 in each of the fixed contracts for three years, four years, and five years. These fixed contracts have low fees and guaranteed returns. When it’s time to access the funds after the surrender charge period, you can take the money in full and pay taxes on the interest, or you can transfer it to another contract and continue to defer taxes.
You can also convert the fixed contract after the surrender charge period. Converting it means taking guaranteed fixed income payments for life. Once you convert the fixed contract, you cannot make any changes to it. You might be able to leave a portion of your interest to a remaining beneficiary, but that depends on the option you choose for payment.
Note: You may want to purchase fixed interest contracts from different companies. Each company (and product) has its terms, requirements, and interest rates, so review your options carefully and choose what works best for you.
What is a Fixed Ladder?
A fixed ladder is a combination of fixed contracts (MYGA) and fixed indexed annuities (FIA). It has the potential for a slightly higher overall return due to the indexed option from the FIA portion of the ladder.
What is a Fixed Indexed Annuity, or FIA?
A fixed indexed annuity, also known as an indexed annuity, fully protects your capital but also includes a growth element tied to an index (usually the S&P 500). Fixed indexed annuities are designed to compete with the returns of certificates of deposit.
Other Strategies for Receiving Guarantees in Investment Contracts
Receiving guarantees in investment contracts can be organized for income in many ways. Let’s take a look at some ladders that provide continuous income.
Lifetime Ladder Using SPIAs
The lifetime continuous ladder strategy involves purchasing Single Premium Immediate Annuities (SPIAs) over a specific period. SPIAs are guaranteed contracts that pay income immediately after the contract is purchased. The strategy is designed to take advantage of rising interest rates as the beneficiary’s life expectancy approaches the contract. For example, if a person has $500,000 and wants to ensure a lifetime income stream but is concerned about the current low-interest rates rising in the future, an effective lifetime ladder would involve purchasing a $100,000 SPIA annually for five years. Even if interest rates remain stable during that period, the subsequent payments will be higher based on the beneficiary’s age at the time of purchase. If interest rates rise, the payments will be even higher.
The Ladder
Laddered by Target Date Uses DIAs
This type of ladder involves long-term guaranteed contracts, also known as Deferred Income Annuities (DIA), with income starting at different time periods. Deferred contracts earn interest during the accumulation phase, then can be converted into lifetime income. The laddering strategy by target date is typically used to combat inflation by generating lifetime income streams at future dates. An example could be a 60-year-old with $400,000 set aside to cover future inflation. Four long-term guaranteed contracts (DIAs) will be purchased at ages 65, 70, 75, and 80. The income from guaranteed contracts primarily depends on your life expectancy at the time of income stream commencement, so as you age, the payments are higher. You will convert each guaranteed contract in the order of purchase, with each DIA being paid later at a higher rate.
Source: https://www.thebalancemoney.com/annuity-laddering-145972
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