ANNUITIES
An annuity provides a means of reducing the risk of outliving one's investment income after retirement from full-time employment. Purchasing an annuity may be a possible solution to reducing this risk. An annuity may be considered the opposite of a traditional life insurance policy. An individual who buys insurance agrees to pay annual premiums to an insurance company. In return, the company will pay, according to instructions agreed upon at the time of purchase, the face value of the policy in a lump sum to beneficiaries when the purchaser dies.By contrast, an individual who buys an annuity pays the insurance company a sum of money and, in return, will receive a monthly income for as long as the purchaser lives. Naturally, the longer one lives, the more money is received. The holder of an annuity never outlives the return, regardless of how long-lived the individual is. Life insurance protects one's beneficiaries against financial loss as a result of the purchaser's dying too soon, while annuities protect purchasers against financial loss as a result of living longer than their funds do.
Annuity income depends on life expectancy and is thus classified as life insurance. Understanding this is important because the classification allows the annuity's investment earnings to be treated as tax-deferred, with no tax on its accumulation until payments are received.
CERTIFICATE OF DEPOSIT
The concept of the certificate of deposit (CD) is simple. It is a savings instrument issued by a financial institution that pays the purchaser interest at a guaranteed rate for a specific term. When the CD reaches maturity, the investor receives the principal and interest earned. Unlike bond interest (paid periodically), the interest from a CD usually compounds, which means interest is earned on prior interest earned also. An investment in CDs, up to $100,000, is insured by the federal government.
CDs are appealing for safety, liquidity, and convenience. Less appealing is the lower yield when compared with other investments. CDs make sense as emergency funds, savings for short-term goals, a way to complete a long-term goal, and a place to park; money while an investor seeks more profitable investments.
CORPORATE BONDS
A bond is a form of debt issued by a corporation in exchange for a sum of money lent by the buyer of the bond. The issuer of the bond promises to pay a specific amount of interest at stated intervals for a specific period. At the end of the repayment period (on the maturity date), the issuer repays the amount of money borrowed.
It is important to understand the differences between corporate bondholders and corporate stockholders. The holder of a corporate bond is a creditor of the corporation that issues the bond, not a part owner, as is a stockholder. Therefore, if the corporation's profits increase during the term of the bond, bondholders receive no benefit since the amount of interest they receive is fixed at the time the bond is purchased. On the other hand, the bondholders' investments are safer than those of the stockholders. Interest on bonds is paid out before dividends are distributed to stockholders. Furthermore, the claims of bondholders take precedence over those of the stockholders in the case of bankruptcy or liquidation.
When interest rates rise, bonds lose value; when interest rates fall, bonds become more attractive. Most bonds issued today are "callable," which means corporations can recall them if interest rates rise before the maturity dates.
GOLD
Some investors find gold an appealing investment. Gold has been used as money since biblical times. Several characteristics of gold have made it desirable as a medium of exchange and for investment. Gold is scarce. It is durable. More than 95 percent of all the gold ever mined during the past 5,000 years is still in circulation. It is inherently valuable because of its beauty and its usefulness in industrial and decorative applications.
Gold has been referred to as the "doomsday metal" because of its traditional role as a bulwark against economic, social, and political upheaval and the resulting loss of confidence in other investments, even those guaranteed by national governments.
As an investment, gold is not for the faint of heart or for people who desire a high level of predictability. Its value can fluctuate daily, owing to economic and political conditions. When interest rates in the United States fall, the dollar grows weaker in relation to other currencies. As a result, foreign businesspeople find U.S. investment less attractive, and some of them invest in gold instead. This forces the price of gold higher. When interest rates in the United States rise, the reverse occurs.
Investing in gold may be done in several ways: bullion, coins, shares and funds, and certificates. A number of companies specialize in the buying and selling of gold.
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