Looking for guaranteed income? It’s not easy – and you’re not likely to get rich on guaranteed income generators alone. One of the fundamental rules of investment is that rewards over and above what investment theorists call the “risk free rate of return” are only available to those who take some risk with their money. That said, as you get closer to retirement age, you are going to want some guarantees in place. Here are some of the most popular options.
Guaranteed lifetime annuities
These vehicles provide a guaranteed annual or monthly income for life – no matter what happens to the market, and no matter how long you live. You can also elect a contract that guarantees the stream of income will continue for as long as either you or your spouse (or some other individual you select, such as a child or grandchild) lives.
These are contracts, not investments. You contribute premium to the insurance company and in return they are contractually bound to send you the income as specified in the contract. The contract is an obligation of the general fund of the insurance company. The insurance company guarantees the payment, but of course such payment is subject to the claims-paying ability of the insurance carrier.
Fixed annuities
If you want a guaranteed rate of return, together with tax deferral, but you don’t need the income to start right away, consider a fixed annuity. These simply credit a guaranteed return for a set number of years – tax-deferred until you actually begin taking income.
Fixed index annuities
These are more complex insurance products (not investments) that offer a minimum guaranteed credit that is usually quite modest compared to the fixed annuity alternative. However, if the stock market does well, you have the opportunity to participate in a portion of the gain. If the stock market drops, you still receive the minimum guaranteed credit. These may be appropriate if you believe markets will rise, you don’t need the money for a number of years (surrender charge periods can be 7 years long or more with these instruments), and you don’t want to take the chance of losing money.
As with other annuity products, their ability to pay claims is subject to the continued strength and liquidity of the insurance company.
Guaranteed investment contracts
These are commonly found in 401(k) plans and 403(b) plans. They simply offer a guaranteed rate of return. They are not generally protected by any kind of outside insurance or guarantee, but most planners consider them quite safe.
Money markets
Money markets are a form of ultra-safe mutual fund designed to maintain a net asset value (NAV) of $1 per share. The investment company typically takes contributions and invests them in very safe short-term government notes, highly-rated short-term government bonds and commercial paper from issuers believed to be quite safe and solid.
Certificates of deposit
If you want a government guarantee, then consider a certificate of deposit. This is one way banks raise money to lend out to investors and homebuyers. They will pay you a rate of return slightly above the passbook savings account or checking account rate in return for a commitment from you to keep your money there for a certain period of time. Bank CDs are insured by the FDIC. Credit Unions also offer them, insured by the National Credit Union Insurance Fund.