Due to a variety of political and economic factors, individuals are having to make some tough decisions as it relates to their retirement and investment accounts. I want to focus on addressing those tough decisions, as well as some alternatives to being positioned in stocks, bonds and mutual funds.
I run across two common situations that are causing people heartburn. Either they have a bunch of money earmarked for retirement in a 401(k), IRA or other retirement account, and the account balance is dropping every day due to market instability. Or they have a lot of cash sitting in checking, savings or CD accounts at the bank, earning little to nothing.
Let’s talk about the 401(k), IRA and retirement account money first. Consider these questions, especially if you are getting close to retirement or already retired. Your answers will give you some perspective on what changes to make to your investment accounts, if any.
Will I need income from the money I’ve invested in the markets at any time in the next 10-12 years for basic living expenses or discretionary spending in retirement?
We all feel the effects of our current economy with gas prices at an all-time high, inflation getting out of control and interest rates increasing. It’s reasonable to assume we could be in for at least another six years of a shaky market. That means it could be 10-12 years before market accounts get trued back up.
If you are trying to ride this out and you’re not currently making contributions, consider if you can afford to leave that account alone for a 10-12-year time horizon to allow the market to come back. Most of the time, I advise my clients to start scaling down on the amount of market exposure they have when they get within 10 years of retirement. I recommend only leaving the amount of capital in the market that you can afford to leave alone for at least 10 years.
Are you currently contributing to your retirement account and likely to do so for the next 10 years?
A market-driven account usually makes the most sense when you are working and contributing to the account. If you are currently contributing and are likely to do so for the next 10 years, you will be able to take advantage of purchasing equities at a discount when the market is down; therefore, you are able to buy more shares and capitalize when the share price goes back up.
If you are not contributing to your account, your account is basically like a bobber on the high seas going up and down. You just hope that the market will be up when you need to take some income.
Take time explore where you are with how much you want to be in stocks, bonds, and mutual funds.
If you were sitting at your dinner table, and you took all the money you have currently invested in the stock, bond and mutual fund market and put it in stacks of $100 dollar bills in the middle of the table, how much would you want to put right back into the market?
I ask this question of all my investment clients. Their answer often takes them by surprise. Most of the time the first thing out of their mouth is, “I wouldn’t put any of it back in the market!”
Now let’s back up a step. Is it really that you don’t want any market exposure, or that you want to limit your market exposure? Maybe you’re more comfortable with 20% or 40% of it back in the market. If you ponder your answers to these questions it may help you determine if, how much and where you should be investing based on your fears, concerns and risk tolerances.
If you have determined that you want to move some of your qualified retirement account money out of stocks, bonds and mutual funds, then the next question is, where is a good place to invest money right now?
I assume you would probably like to create some steady income that is reasonably reliable. Remember, it’s not about how much cash you have, it’s about how much cash flow that cash can generate. There are some great options for parking cash in a shaky economy with a large, reputable insurance company. Options such as life insurance cash values, fixed annuities and lifetime income annuities may offer some guarantees, but the income potential is usually lower and may not have enough to keep up with inflation.
Income-producing real estate may be another option. It’s an investment vehicle that tends to be lower risk, with the potential to produce income and growth as well as potential tax advantages.
Equilus Capital Partners LLC has income-producing real estate projects in the Northwest. Our investors like the fact that they can drive a few hours and physically see what they are invested in. If you are using straight cash to invest, you may be able to take advantage of a depreciation schedule, which could provide some tax advantages on the income you receive.
Finally, let’s talk about cash! I’m referring to the cash in your checking, savings and CD accounts at your bank. These can be attractive places to park cash short term. Generally, I advise only keeping about 6 months’ worth of your living expenses in the bank, plus any other larger amounts you expect to spend in the next year. Anything more than that you should consider investing.
The big risk of parking cash in checking, savings and CD accounts at the bank is that the growth will not keep up with inflation.
I remember in 1997, gas was 99 cents a gallon. Now it’s hard to find a place that sells gas for less than $5 a gallon. If the growth of your money does not keep up with rising costs, you will be forced to spend into your principal. And if you live long enough, you might run out of money. Don’t let your cash sit around doing nothing.
Work with a financial adviser to determine the best options for you and get the most out of your money.
Jake Carpenter is vice president of investor relations for real estate investment company Equilus Capital Partners LLC. He has professional expertise in estate planning, business succession, wealth transfer and asset management. He works out of the Wenatchee and Tri-Cities offices and can be reached at (509) 665-8349.