Aug

10

6 Steps To Securing Your Retirement And Sleeping Well

Posted by cameron

August 10, 2007 |

The two greatest concerns for older people are: 1. Will I have enough money during retirement, and 2. Will my money last? To answer these two questions you must have the following two things: 1. A plan, which I covered in previous posts, and 2. An investment/withdrawal strategy, which is the subject of this post.

Imagine you retire today; what will your savings be invested in? Your strategy needs to be one that has safety at the front end and more aggressive growth at the back-end. Although everyone will have different degrees of risk sensitivity, the nature of a progressively more aggressive plan will still be there, just some more aggressive than others. If you want to sleep at night then follow these steps:

  1. Break your savings into 5-year pieces. E.g. Figure how much you need per month and multiply by 60 to get the amount for each 5-year period. When you do this it is easy to see how long your money lasts or whether you need to adjust your plan. Don’t worry; investment growth should take care of inflation so you can figure everything out in today’s dollars.
  2. The 5-years money you need the soonest should not be in stocks, and Bonds are a little shaky right now. With Money Markets, CDs and treasuries all exceeding the inflation rate, there are many low risk choices. Put this where you feel the most comfortable and secure. Just make sure you exceed inflation, which rules out Bank Deposits.
  3. The next 5 year period can be the same, depending on how risk sensitive you are. For others this period is a mix of money markets, bonds and some stock. Pretty conservative mix. This could be one of those “Lifestyle Managed Mutual Funds”. For some this will also be too risky so, if that is you, just repeat step 2.
  4. The third 5-year period would see more stocks and less fixed income. I.e. less conservative. It is easy to be too conservative. Your money must grow so you don’t run out or inflation just eats you up.
  5. Beyond the third 5-year period, 15 years from the beginning, is 100% stocks. For others it may simply be like the earlier, more conservative, periods.
  6. Once a year re-balance your portfolio so it always looks the same going forward. E.g. the next five years are always in fixed income, low risk investments.

From this you can see that you actually only need 15 years worth in 5 year increments with the rest in long-term stock investments. In this scenario you can just divide your investments into two pieces; the first is equivalent to 15 years of income and the rest is in stocks. This is how to sleep well, no matter what the market is doing.


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