Money Matters: “Baskets of Money”

Story by Guest Columnist Pete D’Arruda. Photo by Michael Hodge.

Cary, NC – During the last  twelve years, we have witnessed significant and historic market fluctuations. Has this affected people’s thoughts about the market, their investment portfolios, and how they live their day-to-day lives?

For some people, there is no change in their thoughts or behavior.  For many others, the impact  is tremendous emotionally, psychologically, and financially.  It is important for people to separate their money from their emotions, but this is difficult if their emotions depend on their money. However, diversification, proper income planning, and using a “baskets of money” strategy can help ease one’s negative emotional reaction to their financial situation and volatility in the market.

Baskets of Money

I call it “basket planning” and we use it often because it makes so much sense. It is essentially educating yourself on having at least four different baskets of money – one for immediate income and three others that grow and provide income down the road.  At least one of the “baskets” should be guaranteed income you cannot outlive, with remaining money passing to children, grandchildren, or charity.

No Income Change

Despite the decline in the market between 2007 and 2009, none of the folks who implemented this “basket strategy” had to make changes to their financial strategies.  Their income did not change and the drop in the market did not affect their ability to continue living in the manner they wanted.  They were essentially unaffected by the market decline.  Then, as soon as the market started to see some increases, many in these strategies saw portfolios begin to rise with the market.  A good “basket strategy” could be the difference between a 30% decline or a 30% increase in a portfolio.

Strategy- Four Different Annuities

There are multiple “basket strategies” out there and it is important to differentiate one strategy from another.  The one I prefer is the one I call the “baskets of income strategy.”  This strategy involves using four different fixed or fixed-indexed annuities, all with unique terms and benefits.  This means the money in safe places is not vulnerable to market swings, is always gaining money, and will always have guaranteed income.

A good well never runs out of water

Think of a “basket strategy” as a water well.  It is a well that is always providing water and, if setup right, the water automatically flows right to you and never runs dry.  The baskets represent stages in your  life, with a basket of money for each stage, and the water never runs out.  The main goal is to provide an annual stream of income for 15 years.  At the end of that 15 year period, the final basket still contains an income account with a value equal to or greater than the total amount you started with.  The final basket is always built with a guaranteed income withdrawal benefit to supply a lifetime income to take the holder  the rest of the way. This will help you enjoy a predictable and guaranteed yearly income. It is important to utilize annuities from highly rated and quality insurance companies.  Think of the peace of mind you will enjoy by not having to worry about  your retirement income vanishing into thin air because of market shrinkage.

Some clients like the water wheel analogy.  The first basket in the wheel is pouring out water (income).  There are more baskets right behind the first one and they are continuing to fill up, preparing to pour water (income) once the first basket empties.  This example shows there is constant motion and a consistent and predictable cash flow with no worries about account evaporation.

Fixed Income Annuities

It should be noted, that we developed my basket strategy by examining a variety of fixed-indexed annuities and comparing the results to the S&P 500.  We also looked at dividends, the Vanguard Global Bond Index, and the Money Market Index.  We discovered that many fixed-indexed annuities actually performed quite well. In fact, they tended to do as well or better than the other alternatives  investigated over a period of time up to the end of 2008 without the inherent risk.  This has been backed up by a recent Wharton School of Business study titled “Un-Supermodels and the FIA – Guaranteed Living Income Benefit Insurance Products” by Dr. David F. Babbel

Our “basket strategy” has not only helped my clients find financial peace of mind and money when they need it, but has also significantly increased financial safety and peace of mind.

About the author:

Pete appeared in one of our Profiles stories and is an independent financial planner located in Cary known as “Coach Pete” to his clients.  He is president of Capital Financial Advisory Group, LLC, a North Carolina Registered Investment Advisory firm. His radio talk show, “The Financial Safari” is heard weekly on many radio stations locally (Sat 8-9am on WRDU 106.1 FM) Have a question? Send him an email.