a risk that the issuer might default and not pay the interest or princi- pal. On the other hand, they gener- ally have higher interest rates than Treasuries. Because of default risk, diversification is important. You can utilize fixed income mutual funds to achieve this diversification. However, your principal will almost certainly vary over time. Also, fund income is usually paid out as dividends, which might have different tax conse- quences than interest on bonds. Fixed annuities are contracts with an insurance company whereby you make an initial investment and receive a fixed interest payment, often for the remainder of your life.
The payments are the obligation of the insurance company, which means you take on credit risk by buying fixed annuities. Most annuities enable you to add beneficiaries – though there is a cost for doing such. Taxes on annu- ities are generally only owed when you receive payments. There are also various fees that may be associated with annuities, such as administrative fees and surrender charges for early termination of the contract. Because of all the variations, it is essential that you get good financial advice and understand all the terms and costs of an annuity contract before you invest. This hasn’t been an exhaustive list of bank alternatives. But I do hope it
gives you a good starting point to do your research and have a conversa- tion with your financial advisors.
Disclaimer: The views expressed in this article represent those of the individual author. Stephen Fauer, CFA Stephen Fauer is Chief Investment Officer of Pinnacle Capital Management, LLC in E. Syra- cuse, NY. He has served in that capacity since the firm's founding in 2006. He oversees all separately managed accounts and serves as portfolio manager to the firm's NYSAFE L.P. fund. He is a 1980 graduate from Michigan State University and earned his MBA in Finance from New York University in 1984.
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