When Transitioning to Retirement 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, when you no longer have a paycheck coming in from work, 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 Two-Step Retirement Transition 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™ of Investments to support your cash flow, but dangerous and foolish during Phase II of your financial life.

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