The financial services industry has been a leader in developing new products in order to meet the consumer’s demand. There is now a new investment paying a six percent annual yield with income payments being made quarterly. The yield is guaranteed and if the income is not taken but deferred, future income can be even higher. Full access to the original investment is available at any time after the initial year and without any type of surrender fee. The company offering this product is wanting to build market share and thus is willing to pay a bonus payment into the account once opened and the entire balance upon the first anniversary. There is no risk to the principal and upon the death of the owner the investment passes tax-free to the heirs. Please read on.
If you are a first time reader of my column, I now know what it takes to gain new readers; offer a fairy tale. If you are one of my loyal readers, I must apologize for the tease, but so often investors jump in based upon the sales pitch and never read the fine print until it is too late. Clearly, what I was referring to in my opening paragraph does not exist. If it sounds too good to be true, it probably is.
With CD interest rates still so low that the promise of what used to be considered normal is now considered unbelievable, this higher rate can bring a flood of inquiries. With the fall of the earnings rate conservative investors might achieve, their ability to set aside part of the income is diminishing. Depending upon how long rates stay at these levels, investors living off of their income may be forced to start consuming part of the principal. When investors reach this step, the reduction in principal drives earnings even lower and pretty soon, most or all of the principal has been consumed to meet ever-increasing costs.
I recently searched the availability of CDs for a client. They had found a CD paying 2.1 percent with an option to step-up the rate if future rates move higher, but must forfeit six months of income for the privilege. To achieve the higher rate, my client would have to tie up the funds for 54 months. At this rate, the income per one hundred thousand invested is $2,100, about one-third of the income created by CD issued not that long ago. I was able to group six CDs from a national bond house where the yield to maturity was 2.55 percent/year and all were FDIC insured. Better than the 2.1 percent, but still far from what most investors are wanting. This is the reason many jump before all of the fine print is dry when they see rates at five percent or higher being presented.
For those willing to take on some risk, there are other investments such as preferred stock, corporate bonds, and other structured instruments that may create higher income while remaining within an investor’s risk tolerance. This type of solution is generally customized to the investor through a personal meeting rather than an off the shelf offering from a financial institution.
Again my apologies to my loyal readers if my tease made your heart skip a beat.
For assistance with portfolio allocations, insurance, estate planning, or investment management contact me at Quality Financial Concepts or one of the other Certified Financial Planners in our area. To continue a personal quest for education, you can also view our learning center on our website, www.goqfc.com. There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other free tools.