James Swanson commentary on these extraordinary times:

The headlines of late have compared the current credit crisis with the crash of 1929. Here are five reasons why I disagree with this assessment.

1. Bank deposit insurance. This program was created after the events of 1929. The Federal Deposit Insurance Corporation was set up in 1933 to guarantee the safety of checking and savings deposits. Today, with that insurance in place, the average investor is assured that his or her deposits up to certain amounts are safe.
2. Knowledge. The year 1929 has been very closely studied. U.S. Federal Reserve Board Chairman Ben S. Bernanke made his career and fame as an academic by studying the causes, ramifications, and solutions to the events of 1929. Has he acted on this? He sure has. As head of the central bank, he began cutting rates a year ago, and since then he has implemented very creative and unusual liquidity plans in the United States to help shore up both the economy and the financial system. Under his leadership, we have seen the creation of an extremely decisive and activist Fed.
3. A manufacturing versus a service economy. In 1929 the U.S. economy was much more oriented toward manufacturing, which is cyclical. Today, the economy is service oriented, which tends to be more stable. Federal, state, and local government workers are a big component of our service economy today and make up about 20% of the work force. The number of these workers is increasing not declining. Health care and education, which compose about 8% and 3% to 4% of the economy, respectively, are industries that are not as susceptible to cycles and whose work forces are expanding.
4. Farming. Back in 1929, one in five workers was employed in agriculture. Today that number has declined to 2 out of 100 workers. Back then, irrigation was unsophisticated, and many of the grain-producing states were in the midst of a drought. Given the large numbers of workers employed in farming, unemployment became a problem. We are not experiencing this type of labor crisis today.
5. Trade. During the 1920s and 1930s trade laws were extremely draconian and restrictive. These laws essentially created an environment of tit for tat among countries. This environment had the effect of restricting trade among various nations. We are not experiencing a similar situation today. Trade is flowing very freely compared with that era.

This is not a perfect world, but it is too easy to make dramatic comparisons to a distant age when many of those comparisons are invalid.

The views expressed in Chief Investment Strategist Corner are those of James Swanson and are current through September 24, 2008. They do not necessarily reflect the views of MFS® portfolio managers or other persons in the MFS organization. These views are subject to change at any time based on market and other conditions, and MFS disclaims any responsibility to update such views. No forecasts can be guaranteed. These views may not be relied upon as investment advice or as an indication of trading intent on behalf of any MFS fund.

The investments you choose should correspond to your financial needs, goals, and risk tolerance. For assistance in determining your financial situation, please consult a financial advisor.

Source: MFS research
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By Bob Carlson

Running out of income is the biggest fear of most retirees. Annuities often are the best way to avoiding running out of income. Yet, few people take advantage of this opportunity, and many who do buy annuities make the wrong decisions.

That is because annuities are complicated, and commissions can give sales people the wrong incentives.

This should change. New regulations are being put in place by the states to limit deceptive and abusive sales practices of annuities. This should make annuities clearer and more consumer friendly and enable investors to increase their financial security by using annuities when appropriate.

Let’s take a look at different annuities and which can best ensure lifetime income.

An annuity can be fixed or variable. A fixed annuity pays a fixed rate of interest. Actually, the rate changes, usually every year. But it is set by the insurer and is known for the next period. The interest rate usually is similar to that of intermediate-term corporate bonds, but there is little risk that the account’s balance will decline as stocks and bonds can. A fixed annuity can substitute for bonds in a portfolio.

A variable annuity is invested as directed by the account owner among mutual fund choices made available by the insurer. The returns for the account will vary with the returns from the investments. Returns can be negative.

Variable annuities have several layers of fees. There are some low-expense variable annuities, such as one offered by Vanguard, but most variable annuities have high fees. With any variable annuity, the fees will be higher than from owning mutual funds in a taxable account.

The advantage of either type of annuity is that the investment income compounds tax-deferred in the annuity. But the income is taxed as ordinary income when withdrawn.

If long-term capital gains from mutual funds are earned in a taxable account, the maximum tax rate is 15%. But if the funds are held in a variable annuity tax-advantaged gains are converted into ordinary income.
Because of the higher costs and potential tax disadvantage, a variable annuity should be purchased only by someone who will invest for a relatively high rate of return and who can let the account compound for at least 12 years. The investor also should have exhausted all other tax-advantaged investment opportunities, such as 401(k)s, IRAs, and Roth IRAs.

A third type of annuity, the equity indexed annuity, is a hybrid of the other two.

An annuity also can be either deferred or immediate.

An investor makes investments in a deferred annuity in either installments or a lump sum. The investments are put in the account, and the earnings compound tax deferred over time. Fixed, variable, and equity-indexed annuities all can be deferred.

There usually are several options for withdrawing money from a deferred annuity. The account can be withdrawn in a lump sum, as unscheduled periodic withdrawals, or as fixed, scheduled payments. The last method is known as annuitization.

An immediate annuity begins payments within one year after the investor purchases the annuity and the payments are on an annuitization schedule. The payments usually are scheduled over the life of the owner, the joint life of the owner and spouse, or the longer of life and a term of years. For example, payments might be scheduled for the owner’s life or 10 years, whichever is longer. That way, if the owner dies prematurely, a beneficiary gets some income from the annuity.

Immediate annuity payments usually are fixed for life. There are some annuities that make variable payments. These were discussed in the November 2005 issue, and the article is in the Annuity Watch section of the Archive on the web site.

Immediate annuities are the best way to replace the rapidly-disappearing company pension. A portion of an individual’s retirement assets can purchase an annuity. The steady, guaranteed stream of income replaces the steady income most retirees used to receive from a company pension.

Many investors are hesitant to use immediate annuities. The biggest complaint is that there is no guarantee of receiving a return of the annuity’s principal. If the owner dies after less than his life expectancy, the insurer keeps the account balance. The heirs of the owner would have been better off if the annuity had not bee purchased.

This problem can be averted by choosing a distribution schedule of the greater of life or a period of years or for the joint life of the owner and a beneficiary. But that reduces the payout.