Brick House Savings
Strategy One - The CD Alternative
This revised version of The Twisted Story of Three Little Pigs will be explained in detail later. As Nelson Nash (one of my favorite teachers and best-selling author and a huge proponent of Austrian Economics) once said, “If you know what is happening, you will know what to do.”1
Read this book very carefully. Soon, you too will realize what is happening and you’ll also know what to do.
A lot of my clients have found what they believe is relative safety by investing in bank CDs. These Certificates of Deposit have recently been offering very low rates of return - typically less than 1%. Investors do pay ordinary income tax if the CD matures in 12 months or less.2 They also like that Bank deposits are usually covered by the Federal Deposit Insurance Corporation (FDIC) up to certain limits.3
In later chapters, we’ll dive deeper into the use and abuse of language, word choice, and perceived and real word meaning in the world of Government, Wall Street, and the Federal Reserve Banking System. For now please accept my caution to be wary of our government’s use of the word “insurance.”
Insurance companies are legally required to have reserves that exceed their liabilities (claims for health, property and loss of life, etc.). This means they have to have over 100% in reserves. According to its own website4 the Federal Reserve has a goal of having a 2% “reserve ratio” set aside to cover the possibility of a run on the bank. Some sources estimate that the actual reserve ratio is less than a half of one percent.
Sorry. Am I deflating your FDIC confidence bubble? I wouldn't do that unless I had an alternative. Since this book is all about SmartWealth Saving Strategies, it stands to reason that we’d better have a better plan. And we do.
The insurance industry has what is called a MYGA. This Muti-Year Guaranteed Annuity works a lot like a bank CD but with a couple of nicer nuances.
Depending on the length of the MYGA and the amount of the deposit, rates of return (at this writing) are in the 2.5% to 4% range. MYGA’s typically come in one to ten year lengths and are offered by many B+ and better insurance companies. A lot of people put money into a bank CD because they want the safety of not losing their principle. If you don’t need the money in your bank CD and you’re willing to park that money for a few years, a MYGA might be a great alternative.5
Just like a long term Certificate of Deposit, the Multi-Year Guaranteed Annuity will grow with compounded interest and will be taxed upon withdrawal.5 Some insurance companies offer a fixed-rate deferred annuity that can pay simple interest every year (paid monthly if you wish) or the gain can stay in the policy and compound for future withdrawal. Some of these policies even have a first year bonus and guarantees that you can remove all your principle if the rate drops below the guaranteed rate.5 Taxes are paid at the very end of the term instead of annually.2
Be aware, my worthy student of SmartWealth Strategies, that your CD is not only earning a paltry rate of return but this type of investment is actually COSTING you money. When the inflation rate exceeds your rate of return, you are losing money BIG time.
What would you do if you could get a first day "signing bonus" of 8% and annual guaranteed returns of 7% compounded for ten years with a guaranteed monthly lifetime income that you couldn’t outlive? 5
What would you do if you needed a monthly cash flow and could have access to a federal pension income based on a discount rate of 6% to 8% instead of the paltry interest rate you get at the bank? 5
What would you do if you could get tax-free growth and tax-free access with a guaranteed minimum of 1% and a ceiling of 11%? 5
Author's Note:
The answer to these and more of your questions will come in the later chapters of this book. Remember you’re getting the book a chapter at a time as a monthly newsletter. But if you need help sooner, just give me a call at 509-32SMART that's 509-327-6278 or toll free at 888-895-9995 or email me at SmartWealthNewsletter@gmail.com . We’ll arrange for a quick 15 to 20 minute review on the phone. Then we’ll schedule a free 30 to 60 minute consultation. If I can help you, I will. If I can’t, I’ll plainly tell you.
Footnotes and references:
1 Becoming Your Own Banker, Fifth Edition, page 65, by R. Nelson Nash.
2 This book is not designed to provide legal or accounting advice. Check with a trusted financial advisor before you make any investment choices.
3 http://www.fdic.gov/deposit/deposits/changes.html accessed on 8/12/2013.
4 http://www.fdic.gov/deposit/insurance “Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act) revised the FDIC's fund management authority by setting requirements for the Designated Reserve Ratio (DRR) and redefining the assessment base, which is used to calculate banks' quarterly assessments.” also “The Federal Deposit Insurance Act requires the FDIC's Board to set a target or DRR for the DIF annually. Since 2010, the Board has adopted a 2.0 percent DRR each year. An analysis using historical fund loss and simulated income data from 1950 to 2010 showed that the reserve ratio would have had to exceed 2.0 percent before the onset of the two crises that occurred during the past 30 years to have maintained both a positive fund balance and stable assessment rates throughout both crises. The FDIC views the 2.0 percent DRR as a long-term goal and the minimum level needed to withstand future crises of the magnitude of past crises.”
5 Again, this book is not designed to provide legal or accounting advice. Check with a trusted financial advisor before you make any investment choices. Furthermore, rates can and will change. Finally, because policy features can and do change, no specific company will be mentioned by name. However, all features that are described did exist at the time of this writing.
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