Can You Now Just “Set it and Forget it?”

Let’s assume you’ve taken each step in The Relaxing Retirement Formula™ so far. 

You’ve determined just how dependent you are on your Retirement Bucket™ each year going forward (at least the next five years).

You’ve calculated investment rate of return you must earn in order to have your Retirement Bucket™ remain intact for the rest of your life despite your rising, inflation adjusted withdrawals.

And, you have strategically allocated your Retirement Bucket™ of investments to capture the higher expected long-term returns of a broadly diversified mix of index funds while exposing yourself to an appropriate level of risk and volatility.

Can you now do what Ron Popeil used to say when pitching his latest cooking gadget on television, i.e. “just set it and forget it?”  

You would be better off than most investors during Phase One of your financial life, but not in Phase Two when you have no more paycheck from work to fall back on.   

There are too many other considerations at play in Stage Two including:

  • Minimizing taxes with your:
    • withdrawal strategy, and
    • asset positioning strategy
  • Making sure your Retirement Bucket remains intact!

To ensure a consistent level of risk exposure and generate sufficient liquidity for your cash flow needs, the fourth D of investing is needed: Retirement Bucket Rebalancing.

Long-term academic research of markets has demonstrated that out of balance investment portfolios, with asset classes that have grown beyond their target allocations, take on inappropriate risk exposures. 

And, your cash flow needs constantly change over time.

Given this, on a very strict timetable, objectively evaluate your current vs. your target Retirement Bucket™ allocation to determine if there is a need for strategic and disciplined Retirement Bucket Rebalancing.

Objective vs. Subjective Evaluation

The key word to focus on is objective.   The reason for this is that we have to remove our subjective emotions when investing. It’s challenging to do, but it’s imperative if you want to be successful.

You can’t leave it up to how you feel on a given day.

For an example, let’s contrast how you felt on two different days over a four month stretch:

  • December 24, 2018: broad market prices had just fallen between 20% and 26% from their prior peak only a few months earlier
  • March 29, 2019: broad market prices grew between 13% and 16% in the first quarter of 2019

If December 24, 2018 was your pre-scheduled day to rebalance your Retirement Bucket™, how committed would you have been to rebalance into more stock-based index funds if you subjectively evaluated everything vs. objectively?

If you are like most Americans, you would have said, “you want me to buy more stock funds when we’re in the middle of a bear market? Are you crazy!” 

Most Americans would not only take a pass, but they would do what far too many did, i.e. sell their stock funds of our fear.  And, of course, those who did missed the best first quarter in a decade.

How about right after the best first quarter stock market performance in a decade?

Again, if viewed subjectively like most Americans, you would likely take a pass on trimming back some of your stock fund positions which had grown beyond your targeted risk range because the consensus “feeling” is that there is more growth to come!

This is why it is so critical to objectively rebalance on pre-determined dates in both scenarios.

Retirement Bucket Rebalancing Example

To keep it very simple, let’s assume that you’ve followed each step in The Relaxing Retirement Formula™ so far, and your carefully calculated  investment mix is to allocate 30% to fixed income and 70% to stock-based investments. (We don’t even need to get into specific investments yet to understand the principle.  Let’s simply stick with a basic 30%/70% allocation without factoring in whether that’s a proper allocation for you or not.)

If this was true for you, and you hadn’t rebalanced in three months or so, it’s highly likely that if you took a snapshot of your allocation on Christmas Eve(see above), your mix likely would have shifted to look more like 34% fixed income and 66% stock-based investments because market prices had just fallen sharply across the board. 

If December 24th was your pre-scheduled date to evaluate and rebalance (if necessary), what would be the objective action to take?

The objective answer is to rebalance back to your target allocation of 30%/70%, which requires you to trim back and sell some of your fixed income positions and strategically buy more stock-based asset classes to hit your target exposure.

On the flip side, if your scheduled rebalance date was March 29th, after prices had just risen 13-16%, your objective evaluation would likely have told you to trim back your appreciated stock-based funds (i.e. sell high) and add more to your short-term fixed income positions to bring your targeted mix back into balance.

The bottom line is two-fold:

First, remain objective during good times and bad, as hard as that is during heightened market volatility.  Emotional investors never win.

And, second, successful investing during Phase II of your financial life, when you’re dependent on your Retirement Bucket™ to provide you with monthly cash flow to cover your spending needs, is very different than investing during your “working” years when you had a paycheck to fall back on.

It requires a carefully thought out and disciplined evidence-based “system.”  Random movement for the sake of movement is a recipe for disaster.

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Evidence-Based Investing: The 4 Ds

As we’ve discussed many times, investing during Phase II of your financial life, when your cash-flow “faucet” turns off from work, the stakes go up, and your entire investing mindset and process has to drastically change.

This is where the next set of strategies in your evidence-based investment system are so critical.

After you have set aside what not to invest, i.e. five years’ worth of your anticipated withdrawals to support your cash flow needs in money markets and short-term fixed income instruments, and away from the volatility of your broadly diversified stock funds, implement The 4 Ds:

  1. Determine: What percentage of your Retirement Bucket™ will you dedicate to the higher expected returns a broadly diversified mix of stock index funds have offered vs. bonds and money markets? Historically, the higher the percentage, the higher the probability of capturing higher expected long-term returns and protecting your purchasing power.
  2. Diversify: It can be tempting to invest in a single company (Amazon) or sector (high tech), but your risk increases dramatically. Instead of searching for a needle in a haystack, buy the haystack.  Your chances of outsmarting millions of other buyers and sellers for very long is close to zero.
  3. Delegate: Avoid expensive actively managed mutual funds and hedge funds. Each has a horrible track record of beating their respective asset class index.
  • Only 17% of actively managed funds have outperformed their index over the last 20 years, and it’s a different 17% each year.
  • Instead, use low cost index funds which are a much more disciplined and cost-effective way to own a broadly diversified mix.
  1. De-Escalate: At pre-determined dates during the year, maintain the discipline and strategically rebalance your holdings back to your target exposure so your risk levels remain in check.

The most common question we all hear asked is what’s THE ideal investment mix at this stage in my life?

  1. Is it 100 minus your age?
  2. Is it 60%/40%

The best answer to that question is the mix you can hold through all market conditions so you can capture the higher expected long-term returns markets offer. 

It can be that simple.

All the statistics and sales pitches in the world are of no value to you unless you have the confidence, strategy and system in place to hold your carefully selected Retirement Bucket of Investments through all market conditions, including normal and temporary market downturns like the most recent Covid-19 crash or the 2008-2009 financial crisis.

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Know What NOT to Invest

Unlike investing during your working years when you had a paycheck to fall back on, investing during Phase II of your financial life begins with knowing what portion of your Retirement Bucket™ NOT to invest.

This may sound rather odd, but this is a key strategy in your evidence-based investment system to capturing the higher expected long-term returns markets have earned.  And, it has both practical and psychological benefits:

  • Psychological: it removes your fear associated with market volatility
  • Practical: You don’t want to be forced to sell investments in a down market when you need money to support your cash flow needs.

As legendary Berkshire Hathaway investor Warren Buffett said, “Investing is the transfer to others of purchasing power now with the reasoned expectation of receiving more purchasing power – after taxes have been paid on nominal gains – in the future.  More succinctly, investing is forgoing consumption now in order to have the ability to consume more at a later date.”

However, as we all know, stock markets don’t always move in the direction we want in the short-term, and prices have temporarily fallen 29% of the time historically.

One of the biggest reasons why the overwhelming majority of investors have such awful results, as illustrated by DALBAR, is their increased queasiness with short-term market volatility, especially when they have to withdraw funds to support their lifestyle. 

If prices fall right before you need to withdraw funds, you’ve just suffered investing sin: you’ve sold low!  Or, stated more accurately: you put yourself in a position where you were forced to “sell low” to free up funds for your needed withdrawals.

The Strategy

  1. Hold five years’ worth of your anticipated withdrawals in money markets and short-term fixed income instruments (away from the volatility of your broadly diversified stock funds.)
  2. Direct all dividends you earn on all investments to your money market instead of reinvesting. On average, this will buy you two more years of your scheduled withdrawals.

Knowing you have your cash flow covered for 5-7 years provides you with the confidence to remain fully invested with the rest of your Retirement Bucket of Investments through normal and temporary market downturns. 

Having this strategy in place has drastically increased your odds of capturing the higher expected long-term returns markets have provided. 

Psychologically, this strategy can be difficult for some folks to implement who have never been in a position of “living” on the money they’ve accumulated.  They feel as though they need to squeeze out every ounce of investment return they can on every dollar they have.  This is especially true when market prices have recently climbed.

That’s admirable and correct when you are not dependent on your Retirement Bucket™ to support your cash flow, but dangerous and foolish during Phase II of your financial life.

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Evidence-Based Investing: 3 Facts and 3 Principles

Investing during Phase 2 of your financial life, when you’re no longer dependent on a paycheck from work, is much more challenging.

During Phase 1, your focus is simple: earn a solid rate of return.

In Phase 2, in addition to that, you have a lot more responsibilities to consider:

  1. Withdrawals: You now have to strategize where you will withdraw the cash flow you need.
  2. Tax consequences: You have many more tax consequences to consider and plan for: Required Minimum Distributions from your IRA (RMD), capital gains, and dividends.
  3. Increased Stakes: Without that paycheck from work, your Retirement Bucket of Investments has to last because you have nothing else to fall back on.
    When you’ve reached this stage in your life when you’re now depending on your Retirement Bucket of investments to support you as opposed to your paycheck from work, earning market returns is no longer a luxury. It’s a necessity.
    If you don’t have an evidence-based investment “system” in place which governs your decisions, the odds of earning market returns, and thus running out of money, increase.
    Unfortunately, as the results show, the overwhelming majority of Americans don’t have a system.

Dalbar QAIB

Every year, financial research firm DALBAR performs a Quantitative Analysis of Investor Behavior (QAIB). Here’s what the 2020 DALBAR QAIB Report reveals:

  • 9.96%: The average annual return of the S&P 500 broad stock market Index over the last 30 years from 1990 through 2019 was 9.96% per year (including dividends reinvested)
  • 5.04%: Over the exact same 30 year period, the average annual return of the “average” stock fund investor (i.e. a person) was only 5.04% per year.

Stop and think about all of this for a moment. Over the last 30 years, the actual returns received by investors was only half of what “the market” provided. That’s truly sad.

The obvious question is why has the average investor earned only half of what markets generate?

Given these statistics, we know that markets are not the problem because these figures demonstrate that markets have performed very well. It must be something else:

  • Fees: The fees they paid account for part of the problem.
  • Strategy: The biggest contributor is a lack of strategy, and this is the direct result of not having an evidence-based investment systems grounded in 3 Facts and 3 Principles.

3 Facts

1. Markets Work: Since the end of World War II, 1945-2019, the S&P 500 Stock Market Index has earned:

  • 11.2% per year (with dividends reinvested),
  • 7.3% per year greater than inflation

Bottom Line: Stocks have generated inflation fighting long-term returns.

2. Markets are Volatile: Over the same timeframe from 1945-2019, there have been 93 market pullbacks of 5% or more:

  • 59 of the 93 were between -5% and -10% with an average drop of 7%.
  • 22 of the 93 pullbacks were between -10% and -20%, with an average of price drop of 14%.
  • 9 of 93 were between -20% and -40%, with an average of price drop of 26%.
  • 3 of the pullbacks were over -40% (including the crash in 2000-2002 and the Great Recession Financial Crisis between 2008-2009),

Bottom Line: the market’s long-term climb has included many falls.

3. Markets Recover:

  • Of the 59 pullbacks between -5% and -10%, it took an average of only two months to recover back to the original price before the drop.
  • Of the 22 between -10% and -20%, it took an average of only 4 months to recover back to the original price before the drop.
  • Of the 9 between -20% and -40%, it took an average of 14 months to recover back to the original price before the drop.
  • In 90 of the 93 market pullbacks since World War II, 87% have recovered in 4 months or less and 97% have recovered in 14 months or less.

Bottom Line: All stock market drops have been temporary, and most have been brief.


1. Time Matters

  • Investing is a long-term solution to a long-term problem which is keeping your purchasing power well above inflation.
  • In the short term, stock market prices fluctuate a ton. They always have and they always will.

Bottom Line: Have workable strategy to deal with short-term volatility so you can capture the higher expected returns markets have earned.

2. Costs Matter

  • Just 1% in additional fees costs a $1million Retirement Bucket of Investments earning 8% per year a staggering $2.2 Million in extra fees over 30 years (your joint life expectancy).

Bottom Line: Pay careful attention to fees, especially in annuities, actively managed mutual funds, and hedge funds.

3. Allocation Matters

  • To justify high fees, many Wall Street firms sell superior research and market-beating returns.
  • The evidence, however, paints a very different picture. According to extensive research by Nobel prize winning economist Eugene Fama and Dartmouth Professor Ken French, 95% of historical stock returns dating all the way back to 1928 can be attributed to only 3 factors:
    • Exposure to stocks in general vs. treasuries and other fixed income instruments
    • Exp to smaller vs. larger companies
    • Exposure to value vs. growth stocks

Only 5% of historical returns can be attributed to something outside of these three factors like superior selection and/or market timing.

Bottom Line: Allocation matters much more than superior stock selection.

In order to earn the market returns you need in order to make your Retirement Bucket™ last while it supports your desired lifestyle, employ an evidence-based investment system grounded in these three facts and three principles.

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What You Must Know Before Investing

Every “retirement calculator” I’ve come across from any financial firm always begins with you assuming an investment rate of return you either want to earn or think you can earn.

This completely puts the cart before the horse. It’s what gets so many people into trouble at this critical stage in their lives, and what causes so much confusion and anxiety.

Once you’re past the first steps in The Relaxing Retirement Formula™ and you know just how dependent you are on your Retirement Bucket™ and how long it must last, the next question is, “what investment rate of return do I need to earn to make my Retirement Bucket of investments last?”

I’m now in my 32nd year of coaching individuals and couples through this challenging transition, and I have yet to meet one couple who knew the investment rate of return they must earn in order to make their Retirement Bucket of Investments last before we met. Not one!

This is not chosen arbitrarily. It’s the investment rate of return that allows your Retirement Bucket™ to keep pace with inflation and remain intact year after year while you to continue to spend what you want.
And, it’s different for everybody so there are no accurate “rules of thumb.”

Why This Rate Is Different for Everybody

To illustrate, let’s revisit our two couples, Mike and Mary, and <strongRon and Rose, both age 62. To keep it simple using round numbers, assume each couple has:</strong

  • $2,000,000 built up in their Retirement Bucket™,
  • the same social security retirement income of $3,000, and
  • the same monthly pensions of $3,000

Beyond that, here’s what else we know about them:

Mike and Mary have no mortgage or home equity line of credit, and they have recently completed many major upgrades to their home, i.e. a new roof, indoor and outdoor paint, a new furnace, new kitchen countertops and cabinets, and new bathrooms. They purchased new cars with cash in the last two years which they plan to drive for ten years.

Ron and Rose still have $300,000 outstanding on a second mortgage they took out to pay for their kids’ college tuitions, weddings, cars, and a condo down in Florida they bought a few years back. They both drive high end cars which they replace every three years. And, while their home is very nice, after 26 years, it is starting to look “tired” and will need significant upgrades in the next two years.

Ron and Rose are clearly more dependent on their Retirement Bucket™ than Mike and Mary, meaning they need to withdraw a lot more money each month to support their more expensive lifestyle, i.e. $9,500 per month vs. $6,500 per month.

In order for Ron and Rose’s Retirement Bucket to remain intact for the rest of their lives, it needs to grow faster just to remain full so they don’t run out of money.

  • 4.0% per year: Mike and Mary’s minimum investment rate of return needed
  • 7.2% per year: Ron and Rose’s minimum investment rate of return needed

There is a significant difference between having to earn 4.0% per year vs. 7.2% per year! And, this is why generic “rules of thumb” like 100 minus your age are so dangerous at this stage in your life. It’s impossible for that to be the correct formula for Mike and Mary and Ron and Rose.

Given this, Ron and Rose’s Retirement Bucket Strategy has to be very different than Mike and Mary’s!

When you’ve reached the stage where the money you’ve saved must now support you for the rest of your life, when you’re dependent on your Retirement Bucket™ to “live” as opposed to receiving a paycheck from the work you do, you have to think very differently about how you invest.

Investing without knowing the real rate of return you must earn first is like having invasive surgery without being thoroughly diagnosed first.

It doesn’t make any sense.

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