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Preserving Principal While
Achieving Growth
Let's face it - like most people, you hate to lose money. And even the normal dips (and
dives) of stock prices in this 15-year-old bull market look pretty scary to you. Yet, you
realize you've missed out on some fabulous returns and you're considering becoming a bit
more adventuresome. What are some of your options?
Index Annuities. Your principal will be guaranteed, and so will a rate of interest.
At the end of the term (usually 5 or 7 years), the company will pay you your principal
plus interest, or the value of your contract as measured by the change in S&P 500
Index, whichever is greater. You would choose between various terms, interest rates and
levels of participation. For example, the company might offer 3% interest or 95%
participation for 5 years; or 5% interest or 80% participation for 7 years. You're not
actually investing in the stock market, you're just pretending to. Added benefits:
Tax-deferral on earnings; no probate.
Variable Annuities. You allocate most of your contribution to either a fixed
subaccount (which offers a guaranteed rate of interest for the term selected) or a money
market subaccount. Each month, a designated sum in the fixed subaccount is exchanged for
shares of another (or several other) subaccounts which invest in mutual funds. For
example, you would put $10,000 in the one-year fixed subaccount at 7%. Each month you
would exchange $300 from this subaccount for $100 worth of common stocks, $100 worth of
international stocks, and $100 worth of corporate bonds. (This should sound familiar -
it's called dollar-cost-averaging.) This will also work for IRA rollovers or transfers.
Added benefits: tax-deferral on earnings; no probate.
IRA Fixed Annuities Combined with IRA Mutual Funds. You make a lump sum contribution
to an IRA fixed annuity which allows the withdrawal of interest monthly without penalty.
Principal and interest will be guaranteed in the fixed annuity. Each month, your interest
is automatically transferred from the annuity to one or more IRA mutual funds. Added
benefits: Tax-deferral on earnings; no probate; penalty-free withdrawals for college
tuition and first-time home purchases. Note: This will work with any type of IRA.
CDs Combined with Mutual Funds. You open a CD account. You have the bank pay your
accrued interest directly to your mutual fund account(s). This works best if interest is
credited to your CD monthly. (I've seen some CDs which only credit interest annually.)
Principal and interest will be guaranteed in the CD. Added benefit: FDIC insurance on the
CD.
These descriptions are somewhat oversimplified, but I think you're getting my point.
Investing in mutual funds doesn't have to be an all-or-nothing decision. In fact, programs
such as I've outlined above are extremely prudent ways of handling your long-term dollars.
Michelle H. Wilbers, a noted expert in
financial services for women, is a Registered Investment Advisor and owner of Women's
Financial Services, a company dedicated to providing women with sound financial
advice. Women's Financial Services does not provide legal or tax advice. You should always
consult a qualified professional for advice regarding your particular situation. |
