It has been said that there's really only three things you can do with your money;
- Spend it (consumption)
- Give it away (donate to charity, be philanthropic, pass it down to family or loved ones etc.)
- Give it to "Uncle Same" (in the form of taxes to the IRS)
For the most part, this is true and very hard to argue with!
In reality, though, if people are the slightest bit responsible they should recognize they also have other basic needs that involve their personal finances, money and the big "R" word (retirement).
In a sense, you could say that investing, saving and drawing income are three other things people could do with their money!
This is where an insurance-regulated product called an annuity might come into play. For the purpose of this article we are going to focus on fixed annuities (FA's), as opposed to their counterpart called variable annuities (VA's).
FA's always contain a minimum guaranteed interest rate and owners cannot lose their money due solely to the stock market losing value. Conversely, VA's are considered an investment/security and contain sub-accounts that are like mini mutual funds, so they do contain stock market risk and owners can lose their money due to market volatility.
FA's are essentially "fixed" interest savings vehicles issued by insurance companies that are sort of similar to a certificates of deposit (CD) issued by a bank or a bond issued by the U.S. Treasury, but with some distinct differences.
Most CD's and bonds earn interest and then credit and/or pay interest to the customer every year (monthly, bi-annually etc.). The buyers of these financial instruments typically place some of their hard-earned savings into them to "safely" earn some interest.
I say safely, because most CD's are insured by the FDIC (Federal Deposit Insurance Corporation) and most bonds are backed by the "Full faith and pledge of the United States government." These extra layers of protection make them attractive for people looking to conservatively earn some interest without market risks.
*A few potential disadvantages are traditional CD's and treasury bonds pay relatively low interest and their interest-earnings are usually taxed annually.
What if there was a way for consumers to take advantage of the positives of both interest-bearing bonds and certificates of deposit (CD's), but without those potential negatives?
One alternative solution is a fixed annuity (FA). There are different types or versions of FA's, but those details are beyond the scope of this writing and are addressed in separate articles.
Nevertheless, what you need to know is that fixed annuities (FA's) can offer people the ability to earn reasonable rates of return without forfeiting safety and liquidity! People can still get access to their money with certain liquidity provisions and limits.
FA's can also earn interest on a tax-deferred basis, which is where the term tax-deferred annuity (TDA) and tax-sheltered annuity (TSA) originally came from. Meaning, people can legally and ethically avoid or delay paying income taxes while their money is earning interest and growing inside an annuity. This is also known simply as tax-deferral.