If your financial situation makes preservation of your life savings important, this information will be significant.
In times like these, there is very little certainty available when planning your future financial needs.
Even those time honored government bonds hold a risk that is quite real, even though not readily apparent to the everyday investor.
(We speak of the so-called 'interest rate' risk, where the bonds go down in value when interest rates rise.
) An even more insideous risk is better known as inflation.
So your bank account is protected by the safety of FDIC insurance, what does that type of account do for you when the money is needed for everyday living? Will you be able to buy the same amount of groceries at the supermarket, or fill you gas tank with the same amount of dollars? Reality sets in when the time comes to use your 'safe money'.
The answer to your needs, then, is to have a PLAN FOR ALL SEASONS.
Such a plan would not only provide a guarantee that your principal would be returned to you, it would also offer a way for it to grow in a way that would buffer the effects of inflation.
HERE IS SOME GOOD NEWS: You can enjoy such a program, and it can be done on a NO FEE BASIS.
It is very simple - just two steps are involved.
1.
Select the time when you need to have your principal returned.
2.
Select your favorite mutual fund.
Let's assume that you are looking at a 10 year time frame - you will need to have your fund available to provide an income in 10 years.
You have selected your favorite mutual fund based on your own criteria.
(You can change your mind at any time if you wish.
) The question is: How much to put into the mutual fund and how much to place in a guaranty fund.
What is a guaranty fund, you say? Simply put, it is a place to have your money at work where your principal is NOT AT RISK.
Thank of a bank CD or a government bond.
If you know what interest rate will apply to the account over the ten year period, you simply place an amount in that fund that will guarantee your principal to be available at the end of the 10 years.
This is a mathematical task known a a 'present value' calculation.
For example, at a 4% interest rate, you can know that in 10 years, $6,756 will grow to $10,000.
At a 7% assumption, it only takes $5,093 to grow to $10,000 over that same time period.
It is significant to know that there are a number of safe places for money to grow at a 7% rate.
This growth rate is guaranteed by contract.
The only question is the financial integrity of the guarantor, and this can be satisfied in advance.
Making the following assumptions, here is the practical application of all this: 1.
An initial principal in the amount of $100,000, 2.
A 10 year time frame, 3.
A 7% interest rate.
Place $50,938 in your guaranty fund Place $49,162 in your favorite mutual fund.
Go on a 10 year vacation from managing your money.
On your tenth anniversary, you will have $100,000 from your guaranty fund, PLUS Whatever amount your mutual fund has grown to.
Here is an idea of what that $49,162 mutual fund investment would have grown to: At 6% -$88,042 At 9% -$116,384 At 12% - $152,690 Let's say that you selected the fund that returned 9%, your total nest egg at the end of $10 years would be $100,000 from your guaranty fund, plus $116,384 from you mutual fund.
$216,384 Total And all this took place while you were trying to figure out how to lower your golf score.
Your time frame can be adjusted to any time period from one year to twenty.
Any competent planner can help you with the numbers if you cannot do them yourself.
The same planner can assist you in selecting the best organization for you guaranty fund, and also for your mutual fund selection.
R.
J.
Zimmerman, CFP, MBA