By Keith W. Young, Chairman, DROP Advisory Council
The year 2018 was the worst year for stocks since 2008. If you retired last year and invested your funds in the market, how did your money fare? The Dow fell 5.6%. The S&P 500 was down 6.2% and the Nasdaq fell 4%. Many experts remain cautious, but optimistic about the market in 2019.
How can you protect your DROP money from a market loss when you retire? The answer is safe-money solutions and diversification. Diversification can reduce your market risk by allocating your savings and investments among various financial instruments. Diversification is the most important component of reaching long-range financial goals while minimizing risk.
For example, if you have most of your money invested in mutual funds, variable annuities and stocks, you may want to put a portion of your DROP money into safe money solutions like fixed and guaranteed-interest solutions, ones that offer no fees or risk.
It is important to have multiple savings vehicles for your DROP money that offer both liquidity and long-term growth. For examples, there are IRAs that offer guaranteed, fixed-interest rates that are totally liquid, meaning you can access the money at any time without a penalty.
There are other IRAs that are short-term. Some are two-year, three-year, and five-year durations. For example, a totally liquid IRA may only offer a 1.25% interest rate, while a five-year IRA offers a 4% guaranteed interest rate. So, in most cases, the longer you can wait to take out your money, the higher the interest rate you will receive.
There are other alternative IRA investments that offer a guaranteed rate of 7% for two years. You also may be able to put some of your DROP money into your 403(b) or 457(b) account if it offers a guaranteed interest rate like 3 percent without surrender penalties.
If you would like an IRA that offers guaranteed income for life, there are many available in the marketplace. It is like having a second pension. For example, if a retired teacher at age 62 put $200,000 of her DROP money into an IRA with guaranteed income for life, five years later it would generate $17,150 per year for the rest of her life, even if she lived to 95. If she were to become disabled, the payout would be $34,300 for the following five years, then return to the original amount. Also, if the teacher were to die, any money is left in her account value would go to her beneficiaries. When you add the guaranteed income amount to her FRS pension and her Social Security, she has a guaranteed retirement income!
There are many options for your DROP money. How you invest and save it will depend on your needs for liquidity and long-term growth. Safe-money solutions at this time in your life may be the right financial path for you. Diversification is key to retirement income planning success.
Remember, you can protect your DROP money in several IRAs, both in liquid and long-term growth IRAs or other qualified plans.
If you would like to meet and discuss your many options, please contact a DROP Advisory Council member. We will be glad to show to the many choices that may be right for you.