Money Matters: Investing in Turbulent Times

Story by Lindsey Chester and “Coach” Pete D’Arruda. Photo by Tamás Mészáros.

Cary, NC- Even if you never pay attention to the stock market, you know we are living in what many call turbulent market conditions. The Dow Jones lost all of its gains for 2010 through volatile trading in August. So what should you do if you are investing for your retirement?

I asked our friend Coach Pete for some insight into where people should be looking to invest. If you are like me, you might have money in some mutual funds with the assumption that if it sits there for 20 years, it will have grown when you are ready to cash in. And like me, the flux in the market is giving you  heartburn. Your fund goes up a few thousand, only to have those gains wiped out in a few months.

Pete Discussed His Strategy

First you need to figure out when do you plan to retire. In 10 years? 20? Then  think about how much money you need to live per year. Multiply that amount by 9 to 12 times will figure out your retirement nut. That’s what you need to stash away and start growing.

Future Income Annuities

Of that nut, place at least 60% of that someplace safe where you can’t lose the principle, Coach Pete calls this the Financial Safety Zone. Enter Pete’s favorite: Future Income Annuities. These funds have a minimum amount (around 10%) of liquidity per year as they grow.  Keep in mind, these aren’t designed as “lump sum” accounts but will give you a yearly income and a guaranteed amount for life.

Two Types of Accounts

There are two types of these accounts. Variable, which have fees up to 5% a year attached and are mutual fund based. And a special class called Retirement Income or Future Income Annuities. These range in returns from 5-8.2% a year and many grow in a compounded manner. With over 1,400 annuities on the market today, this can be a daunting process which causes many to get “paralysis by analysis” and do nothing.  Keep in mind that while Variable annuities with an income rider attached do protect your retirement income, they do not protect your original principal should a market downturn strike and a need for money that no longer exists develops. 

Fixed Annuities with a Future Income Rider attached not only protect your future income, they also are by nature, not exposed to market risk- thus they have full principal protection from market evaporation. Money still in the accumulation account of the annuity passes on to your family at death.  Coach Pete spends a lot of his time clearing up a barrage of misconceptions he hears about annuities each day.  It is easy for facts to get lost in the confusion Coach Pete calls the Annuity Soup.

Guaranteed % Return for Life

This guarantees you a minimum amount of growth. When times are tough, the income won’t go lower than the lowest guaranteed amount and when times are good, they will return up to the maximum guaranteed amount. With Fixed Indexed Annuities you “share in the gain on a stock market index’s upside with NO market downside risk.” These annuity funds aren’t for High rollers, who like to gamble. No major gains here, just a safe return.  Some even give you an additional long term care benefit.

Sounds radical, huh?

The earlier you plan for this, the longer your money has a chance to grow.

Pete says when you plan your “Baskets of Money” you should plan your “safe money” first and your “risk money” second. Coach Pete suggests you take as little as you can to guarantee a comfortable lifetime income and place in the safe annuity account.

Real Estate Investment Trusts

Another type of investment with medium risk is Real Estate Investment Trusts. Many of these are now focused on building long term care communities. The aging population and the payment structure of these facilities makes them a good bet.

A second area is Exchange Trade Funds or ETFs.

With this you open an account (such as Ameritrade) and you place your money directly where you want it to go, eliminating the middle man and fees associated with them. There are no commissions and more transparency.

I asked about what to do for college funds and Pete cautioned there is no magic bullet. The problem with investing for college is that in most cases the money only has a limited time to grow, must be liquid and is susceptible to market fluctuations. Not much solace to a Mom who has a high school senior. We have seen our college accounts pretty much stagnate over the last 6-10 years, and still have the same amount in them that we invested originally (thanks Grandma!)

Pete left me with wise advice which flies in the face of many investors: That the younger you are the more risk you can handle. What you need to think about more is “What is a reasonable rate of return?” and aim for that in all things.

And there’s always scholarships…

Coach Pete contributes regularly to CaryCitizen. He recently appeared on My Carolina Today  and WRAL noon and evening news.

Coach Pete on My Carolina Today

Pete D’Arruda’s radio talk show, The Financial Safari is heard weekly on many radio stations locally & syndicated nationally (Sat 7-8am on WPTF 680AM). Have a question? Send him an email.

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