When saving for your retirement, it is vital to have the right allocation of variable investments, such as stocks, and fixed income investments. Fixed income investments are those that have a specified return for a certain length of time. Financial advisers recommend increasing the percentage of fixed income investments in your portfolio as you near retirement. A general rule is to subtract your age from 110 or 120 to get an approximate percentage of how much of your portfolio should be in fixed income investments.
Fixed Rate Annuities
When investing in a fixed rate annuity, an investor can choose a deferred or immediate annuity. A deferred annuity permits the principle investment to grow tax-deferred during the accumulation phase. The investor then receives periodic payments when the payout phase begins.
With an immediate fixed rate annuity, the investor receives periodically scheduled payments as soon as the money is invested. The size of the payments depends on the current interest rates, the amount of the investment, and the investor's age.
When you purchase a bond, you are loaning money to a company or government in exchange for regular payments at a predetermined interest rate and the return of the initial investment. A bond is a fixed income investment because the amount of interest is guaranteed.
Some bonds are backed by a third party who guarantees the principle portion of the bond, while others do not have such a guarantee. Guaranteed bonds are considered safer than non-guaranteed bonds and generally have a lower interest rate.
Bonds also trade on a secondary market, permitting investors to purchase them at a discount or premium. This can affect the ultimate overall return of a bond, though the interest rate remains the same.
Certificate of Deposit
A certificate of deposit, better known as a CD, is a savings instrument that pays a stated interest rate for a specified term. Terms vary anywhere from a month to five years. Investors can elect to receive the interest payments during the CD's term, or they can reinvest the interest so that their money grows even faster.
The rate of a CD varies based on the amount of money invested, the term, and the interest rate climate. Some banks offer promotional rates for new customers or for those investing money from another financial institution.
CDs are issued by banks and are insured by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 with a standard account. Specialized accounts or unique owner situations may be insured for a larger amount.
When it comes to preparing for your retirement, you want your money to work for you. The best way to do this is to invest in savings vehicles that meet your personal comfort level, age, and financial situation. Fixed income investments are a necessary component of most investors' portfolios, enabling them to safely grow a portion of their savings. For further assistance, contact professionals, such as those from Fogel Capital.