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How Safe Is Safe?
Our definition of a safe money place is a place
where it is highly unlikely to lose principal if you follow the rules. We do not say impossible to
lose, because we are not sure if anything is truly impossible. The risk of
loss would be on a par with calling “heads” on a two-headed coin, and
the only way you could lose is if the coin landed on its edge.
Nothing is safer
than a Treasury issued or insured obligation. If you hold a U.S.
government security until maturity you will get back the entire face
value. If your certificate of deposit, savings account, or money market
account is in an FDIC insured bank, your combined account values are fully
protected up to insurance limits. So, the real question is how safe are
the alternatives?
Fixed annuities are only issued by insurance
companies. Insurance companies are examined by independent rating agencies
and assigned ratings based on their financial strength. In addition, each
state in which the insurance company does business examines the books on a
regular basis, and every state has a guarantee fund designed to protect
annuity contract owners if a company becomes insolvent. Based on history,
it is very unlikely you would ever lose principal or interest in a fixed
annuity because the insurance company failed.
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Why
Aren’t Treasury Bonds Listed As A Safe Money Place?
U.S. Treasury Bonds and Bills are direct government obligations and if you
hold them to maturity you will get the stated value. What do you
get back if you need to sell the bonds before maturity? There is no way of
knowing, and this is why they are not included as a safe money place. |
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