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Retirement Income Planning — The 5-Year Rule

Posted by cameron

December 1, 2006 |

In order to best understand this post, you should read my post titled “Retirement Income Planning - My Guiding Principles”. If you haven’t read it, go here first. I have looked at investment company websites and generated plans according to their software but this approach has always left me cold. There is something about handing off my security to someone trying to sell me something that is less than encouraging. Besides, it always seems so complicated. It’s no wonder that people go to financial planners. Its just too darn complicated. So I set out to devise an approach for myself that was easy to grasp, an approach I can actually hold in my head and act on with certainty that I knew what I was doing. A plan I could actually visualize and made sense to me. It starts with the 5-year rule.

If you look back at the stock market it turns out that, on average, a stock market cycle is 4 years long. This is only an average but it can be used as a starting point. Each 4-year cycle is made up of a 3-year bull market and ends with a 1-year bear market before the next cycle begins. The most recent example was the market high just prior to the 9-11 event, which was followed by a bear market. It wasn’t until earlier this year, 2006 that the Dow climbed back above that high to set a new record. That is five years. The moral of this story is that if you need your money in the next five years or less, it should not be in the stock market.

It should be obvious by now that any retirement income plan must have time as an element. There are examples of stock markets falling and not getting back to the peak. The NASDAQ reached over 5000 at the height of the tech bubble and even now has not made it back to 3000. The Nikkei in Japan was once over 30,000 and today is just over 16,000. Major, long term and permanent corrections do happen. Diversify, diversify, and diversify! Short-term corrections happen. So the plan needs to be secure in the short term and also have a very long-term aspect to it. This takes us back to time being a major component of the plan. You can’t get past that.

For all these reasons what makes sense to me is a retirement income plan that has 5-year increments or buckets. I can now assign each bucket to my age. E.g. 65-69, 70-74 and so on. Now this I can grasp! This means something to me.

In my next post on this subject I’ll describe each bucket as I see it.


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  1. The Carnival Of Money Stories #5 » Silicon Valley Blog About Money on February 19, 2007 10:52 am

    [...] Cameron @ Empty Nest gives us Retirement Income Planning - The 5 Year Rule I have looked at investment company websites and generated plans according to their software but this approach has always left me cold. There is something about handing off my security to someone trying to sell me something that is less than encouraging. [...]

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