A fixed return investment is a type of investment that grows at a guaranteed rate of interest. Fixed return investments usually also have fixed maturities, meaning the rate of return is only guaranteed for a stated period, after which the investment may be liquidated.
Investors buy fixed return investments when there is a need for capital appreciation or income, but also a desire for principal protection.
Fixed return investments are a conservative alternative to stocks, mutual funds, variable annuities, and other market-linked investment.
Certificate of Deposit
A certificate of deposit (CD) is a type of fixed-return investment issued by commercial banks. CD’s grow at an interest rate that is guaranteed for a certain period – usually anywhere from a few months to several years. Once the CD matures, it may be renewed or liquidated by the investor.
In the event of bank failure, CD investors are covered by the Federal Deposit Insurance Corporation (FDIC) for up to $250,000 per depositor.
Fixed annuities are long-term insurance contracts intended for retirement planning. They are issued by life insurance companies to individuals and can be deferred, meaning they grow for a certain period and mature at a future date, or immediate, meaning they begin paying income as soon as they are issued.
A fixed annuity will have a set interest rate that is guaranteed for a specific number of years. After the initial “guarantee period”, the annuity can be liquidated, renewed for another period, or converted into a stream of income payments.
Fixed annuity guarantees are subject to the claims-paying ability of the issuing company.
A bond is a type of debt security, usually issued by corporations or governments to raise capital. In exchange for the bond purchase price, the issuer pays interest payments to the investor, usually semiannually, for a certain period. Once the bond matures, the bond issuer returns the purchase price to the investor.
Bonds issued by the U.S. Treasury are considered risk-free, as they are backed by the full faith and credit of the U.S. government. As a tradeoff for this safety, treasury bonds tend to pay lower interest rates than riskier bonds, such as those issued by corporations.
The guarantees associated with bonds are subject to the credit quality of the issuer. Because of this, bond investors assume the risk of the issuer missing interest payments or defaulting on the repayment of principal.
Bonds are evaluated by rating agencies to let the investing public know how safe an investment in a particular bond is.
Retirement Planning with a Fixed Return Investment
Fixed return investments are very popular in retirement planning. Typically, the closer a person is to retirement, the more of the portfolio is recommended to be held in fixed return investments such as bonds.
The regular, predictable income offered by these instruments can be very beneficial to those in retirement. Also, the protection of principal can give peace of mind to a retiree, ensuring that their nest egg will not be subject to the ups and downs of the market.