Updated: May 3, 2013 12:14PM
Originally published: April 1, 2003
It’s time to revisit “chicken money” now that the Federal Reserve has cut interest rates again. While home buyers rejoice, many seniors who planned to live on their interest income are facing agonizing prospects.
The definition of “chicken money” is simply money you can’t afford to lose. Options for “chicken money” investments are limited to safe, liquid, and--these days--low-yielding places such as insured bank CDs, money market accounts, Treasury bills, and money market mutual funds that invest only in U.S. government securities.
Low yields abound
A quick survey of rates in the Chicago area at Bankrate.com for a six-month CD shows annual rates below 1 percent at the largest banks.
I keep writing about one “chicken money” alternative that might be appropriate for a part of your money that needs safety but also seeks higher yields. It’s a tax-deferred, no-penalty annuity offered only by the AAA-rated TIAA-CREF Life, a subsidiary of Teachers Insurance and Annuity Association.
Now it’s time for an update, but first a word of background about tax-deferred annuities in general. They’re designed for people who want to invest a lump sum (or monthly contributions) of after-tax dollars into an account that will grow tax-deferred until the money is withdrawn.
Most tax-deferred annuities have penalties for early withdrawal from the contract. Typically, the restrictions last for five to seven years. And no matter what the annuity, federal regulations say that any earnings withdrawn before age 591/2 also suffer a 10 percent federal tax penalty.
Those restrictions mean annuity money should be considered a long-term investment, primarily accumulated for retirement. But once you’re past age 591/2, a no-penalty annuity can give you liquidity, plus slightly higher yields based on the investments of the insurance company.
When I first wrote about this product in February 2002, it was paying a guaranteed 5.1 percent. Since then rates dropped and were just reset to 3 percent and are guaranteed to April 2004, when rates will be re-set again. Here’s how it works:
* The current rate for new investments is 3 percent--until April 1, 2004. Then a new rate will be announced--and guaranteed for the next 12 months. If rates move higher during that 12-month period, the insurance company will bump rates up--and guarantee that increase for the next 12 months.
* If rates drop, you can take all or part of your money out at any time, with no penalty! In fact, you can withdraw any amount of money over $1,000 with no penalty once every 180 days.
* You can withdraw your entire investment at any time.
* Rates are guaranteed not to drop below 3 percent--ever.
* There are no contract fees, adjustments or other charges. All costs are built right into the yield you receive.
A chicken-money alternative
So this annuity could be considered as a “chicken money” alternative for at least part of your savings. Seniors who must live on their interest can withdraw money--a minimum of $1,000 per withdrawal--every six months, while others can let the money grow tax-deferred. Since there are no penalties for early withdrawal, you can be sure the insurance company will keep paying attractive rates.
How can they do it? The insurance company is buying investment-grade short- and medium-term bonds and mortgages, and passing the yields--or at least a good part of those higher rates-- on to their investors. But these are not federally insured CDs. They are obligations of the insurance company. You’ll get a prospectus and application, just as with any other investment. The minimum investment is $250, and additional contributions can be made at any time.
If you have questions or want more information, you can call TIAA-CREF and ask about the Personal Annuity Select Fixed Account at (800) 223-1200. I’ve always advised not to put all your “chicken money” nest eggs in one basket, but this is one egg worth sitting on. And that’s The Savage Truth.
Terry Savage is a registered investment adviser and is on the board of directors of McDonald’s Corp. Send questions via e-mail to email@example.com. She appears weekly on WMAQ-Channel 5’s 4:30 p.m. newscast.