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U.S. Credit Rating Is In Danger

Unless you’ve been living under a rock for the last year or so, you are aware of the United States federal government has been trying to raise the debt ceiling to cover their cost of running the country. During that time, credit rating companies, Moody’s, Standard & Poors and Fitch have been debating whether or not to lower the credit rating of the U.S. from it’s current (and long time) rating of “AAA” to something else.

Congress and the Obama Administration have been wasting time of the last three months that has now left little chance of the country’s rating to stay the same. Last October, S&P wrote that they were keeping a stable outlook on the U.S. “AAA” rating on the ground of the current entitlement spending pressures wouldn’t really affect the country in any big way within the next three to five years. Then in April, S&P shocked Washington as well as Wall Street by changing their views and putting a negative outlook on the U.S. rating, saying that there was a one-in-three chance of a downgrade withing two years. It didn’t end there, last week Standard & Poors announced that there is a 50% chance that the credit rating could be downgraded within three months.

All three agencies agree that the U.S. must undertake a major deficit-reduction effort for the near term to stabilize debt levels and to preserve it’s credit rating. The reason for the quick deterioration of the agencies outlook is mainly because of the concern they have of Congress and the Administration not being able to work together. The federal government has forgotten how to work together. The political divide has grown too much to the point where the credit agencies wonder if they’ll be able to work together on other fiscal issues in the future. It doesn’t help that Congress hasn’t put forth a budget for over 800 days.

Even though Moody’s give the U.S. a little more room before they would lower the country’s rating, that’s because of the United States’s reserve currency status. S&P said that if the U.S. rating is downgraded, the country may see interest rates climb 25-50 basis points and reduce GDP by a similar amount.

For those of you who feel like I do about the stability of the country’s economic position, I’ve been increasing my position in the precious metal/commodities sector. I’m not sure if the federal government will ever do the right thing.

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Fixed Indexed Annuity Combines Fixed And Variable ...

A feature of fixed annuity contracts that many investors felt was missing was market participation. Even though variable annuities allow the investor the ability to tie their accounts to individual stocks and other market based products, variable annuities are anything but appropriate for most. For one thing, variable annuities have the ability to completely lose their value during market downturns. Couple this with notorious commission rates and unscrupulous sales pitches, and the variable annuity quickly loses its appeal. In answer to this need from the investing community, the insurance companies created a product that takes the best of both the fixed annuity world and the variable world. This product is called a fixed indexed annuity.

Fixed indexed annuities are fixed annuity contracts that participate in the market indexes. Most contracts tie their rates to the S&P 500, although other market indexes are also used. Rather than subject the contract to risk of loss, they are often given a guaranteed minimum interest rate. In market downturns, your interest rate may be at 0%, but your principal is guaranteed to not fall. Do the math on what type of interest rate you would require to restore your principal if you lost 50% of your account during a downturn. You’ll quickly see the advantage of this protection of principal.

These indexed annuities function much more similar to a fixed annuity than a variable annuity. They participate by giving account bonuses or interest rate adjustments based on the performance of the market. Although your account is tied to a market index, you will not necessarily participate in the full growth of the index. The insurance companies have built in various crediting options to help them counter the risk they take on during market downswings. Your actual participation in index growth will be limited by caps, participation rates, and spreads. How your account is credited will depend on the structure of the individual annuity and can fluctuate greatly between companies and even products within each company. As with any other financial product on the market, be sure to do your research before purchasing. Know your crediting options, and understand how your annuity is supposed to work.

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