Tag Archive for: investing

When Transitioning to Retirement, Reduce Complexity and Consolidate!

After recently losing her father to a long battle with cancer, and having to sort through his estate, one of our Relaxing Retirement members reminded me to share a very important strategy with you so nobody else has to go through the exhausting and unnecessary experience she went through.   

Sorting out all of her father’s bank and investment paperwork took almost two months because it was coming in from everywhere.

When she finally tallied it up, here’s what she discovered.  In addition to numerous bank accounts in several different banks, he had 14 different custodians for shares of stock that he owned, as well as various stock certificates for his original purchases that were located in his fireproof safe in his basement. 

Most of this came about from the break-up of AT&T years ago into all the “Bell” spinoffs like Lucent, Southwestern Bell, Nynex, Vodaphone, Verizon, etc.

In addition to those, he also had 8 different IRA accounts, including 3 in banks and 5 held directly at different mutual fund companies!

In all, that’s 22 different sets of statements in addition to his individual stock certificates! 

Why Did He Have So Many Accounts?

Right now, you must be asking, “OK, why did he have so many accounts?”

As she explained, her father grew up in a household marred by the Great Depression when banks had their troubles and innocent people couldn’t get access to their money.  So, the reason for the different bank accounts was probably to stay under the FDIC insured amount.

As for all of his stock accounts, both inside and outside of IRAs, there’s really no explanation other than he wasn’t aware that he could consolidate them all onto one statement.

Years ago, I had a gentleman in his 70s tell me that the reason for him holding a dozen different IRA accounts was “diversification.”

When I told him that he could keep all the same investments that he had but consolidate them all onto one easy to read statement, he couldn’t believe it.

Why You Should Consolidate Your Statements and Investment Holdings (including Individual Stock Certificates)

He was so conditioned to believe that multiple accounts equaled diversification.

For starters, you can and should consolidate all “like kind” accounts (same title, i.e. joint, etc.) into one account, especially IRAs i.e. Traditional, Roth, Rollover, etc.  This is also true of your retirement plans at prior companies or institutions.

There are several reasons for this, none of which is to boost performance:

  1. Instead of spending time locating statements each month, you can receive one consolidated statement that lists all of your investments broken down by account title.
  2. When it comes time to reallocate or rebalance your investments, you have one source to contact to make the change.  And, that company also does all the record keeping for you.
  3. IRA Required Minimum Distribution (RMD): Once you reach age 72, and you have to begin taking your RMD, you only have to calculate the amount to withdraw from one account, so record keeping is much simpler.  Instead of receiving notification of the required amount to withdraw from several companies, you will only receive one.
  4. Tracking Non-deductible IRAs: Consolidating your IRAs also makes it easier to keep track of non-deductible IRA contributions, and thus accurate filing of your income taxes when you take your annual distribution.  As a simple example with round numbers, if you have $100,000 in IRAs, and $20,000 of that comes from non-deductible IRA contributions over the years, then only 80% of your withdrawal is subject to tax.
  5. On-line access in one location: in today’s world of on-line account access, you can view all of your investment holdings on one website, including your bank accounts.
  6. Last, but not least, it makes it so much easier on your heirs.  Helping our member pull all of this together after the fact reminded me that I take it for granted that everyone knows that you can do this.  Your heirs will be extremely happy that you consolidated everything into one location.

As a final thought, in addition to taking care of this for your family, if your parents are still with us, you may want to approach them about this as well.  It may save you a few headaches down the road!

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When Approaching Retirement, Be Alert for This Confidence Vampire

Unlike the tiny percentage of the American population who live exactly the way they want after they transition to retirement, far too many who have already exercised tremendous dedication to accumulate a sizable Retirement Bucket™ of investments live in constant fear financially.  And this severely limits the lifestyle you’ve earned.

Unfortunately, maintaining your financial confidence in today’s ever-changing and fast-paced world is more challenging than ever. There are obstacles confronting you at every turn.  Today, I’d like to discuss the first of two Confidence Vampires you must be alert for.

Confidence Vampire #1: Financial Journalists

Take a step back for a moment and think about the “business” of financial journalism for a moment (newspapers, television, magazines, radio, internet).

I will preface this to by saying I mean no disrespect to financial journalists, nor do I question their right to run a profitable business.  However, if you want to develop and maintain the unflappable financial confidence necessary to live the life you’ve earned in Phase II of your life, it’s critically important to recognize that their goals and objectives are in direct conflict with your financial confidence.

The way the media makes money is not by informing, teaching, or advising us, and it’s not by providing us with the most relevant and timely information we need.  They make money through advertising “sponsors,” i.e. companies looking to promote and market their own businesses.

So, the #1 goal and objective of all forms of media is to convince as many thriving companies, who are looking to get their “message” out to as many potential consumers as they can, that they have the largest audience of viewers to deliver their advertisements to.

Skilled Copywriters Create Confusion and Unrest

How to do they accomplish that in today’s day and age?  Since investing, in and of itself, isn’t very exciting, their skilled copywriters are paid handsomely to stir the pot, generate confusion and unrest, and convince viewers that the world’s financial system is fragile and unpredictable, that markets could crash at a moment’s notice, and that the only way to protect ourselves is to “tune in” and watch.

It’s a great tool for them to sound unnecessary, but extremely effective alarm bells, capture your attention, and strip away your confidence.

Why Do They Use Points vs. Percentages?

The most blatant example of this is how they report stock market activity throughout the day.  You may recall that in October of 1987, the Dow Jones stock market index fell 508 points. Back then, that represented a 22.5% drop in one day!

Today, 508 five hundred points represents about a 1.5% drop, but the financial media still uses the term “points” throughout the day.  Why do they continue to do this when it’s clear to any rational observer that it’s a distorted measurement of what is going on?

The answer is two-fold. First, “points” sounds like a much bigger deal than it actually is.  If they say, “The Dow fell 500 points today,” that conjures up a lot more fear and anxiety in the viewer than “The Dow fell 1.5% today.”

The second reason, which is brilliant marketing on their part, is to condition you to “keep score” of your investments on a daily basis just like you would keep score of how your favorite team is doing.

Keeping score every inning in a baseball game is necessary to determine how well your team is doing.  However, when it comes to investing, everyone from Warren Buffett, to Peter Lynch, to Nobel-prize-winning laureates like Eugene Fama insists the last thing you should do is react to what’s happening on a daily basis, i.e. keeping score daily.

This is not a recommendation to stop paying attention. Simply be aware that there is a significant conflict of interest between the financial media’s goals and your goals when you tune in and protect your confidence at all costs.

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Beware of Annuities for Your Retirement

I recently had a conversation with the brother of an existing Relaxing Retirement member who is unfortunately, and completely unnecessarily, experiencing some serious pain. 

He and his wife retired last year and now want to split time between a new condo in a suburb West of Boston, and a condo in Florida during the winter.

The reason he called was they were confused and completely frustrated with the answers they were receiving from their advisor, and he wanted a second opinion.

His dilemma, as he explained, was that they both rolled over their 401(k) plans into annuities inside of an IRA because they were told they could earn market returns “without risking their principal.” 

Uh-oh!  Does this sound familiar?

Their dilemma was they wanted to temporarily withdraw a chunk of money from their plan to help finance the purchases and moves.  IRAs allow you to withdraw money and re-deposit funds within a 60-day window without any taxes or penalties.

That was the good news.  Now for the bad news….

What they discovered was that they couldn’t withdraw any more money from their annuities without paying a 12% surrender charge to the insurance company!


On the $450,000 they want to temporarily withdraw and then re-deposit, that’s an annuity surrender charge of $54,000 that can’t be recovered later. 

And, that expense is not tax deductible. 

Can you imagine being in this predicament?  Frustrating and sad at the same time!

After my extended conversation with them, and after thinking about all of the questions I receive about annuities, I thought I’d take the opportunity to discuss the pros and cons so that you can independently understand and personally evaluate annuities for your own unique situation.

Preliminary Comments Regarding Annuities

Before we dig in, just a few preliminary comments…

The first is that an annuity is like any other investment vehicle; they’re a tool to put in your toolbox of potential options. 

They are not a one-size-fits-all solution.  This is one of my biggest pet peeves.  Agents and “advisers” are out there in droves pushing annuities as THE solution to every financial problem.

Like any investment, there must be a very good reason why you would invest in an annuity.  Hopefully, that comes after you’ve carefully and strategically designed a Retirement Blueprint™, and after understanding all the facts and ramifications first.

The second point is that, while there are a handful of annuities that could be a potential option for some to solve a very specific problem, I believe annuities are grossly oversold.  

In my estimation, 99% of the annuities sold are inappropriate. 

Given this, my goal is to help you better understand them so that you can make an educated decision for yourself. 

What’s an Annuity Anyway?

Let’s begin today by first laying out what an annuity is. 

An annuity is simply a savings instrument sponsored by an insurance company. 

There are many different classifications and variations, so let’s tackle those first:

Immediate vs. Deferred Annuity

A deferred annuity has two phases to it:

  • Accumulation: funds you deposit grow inside the annuity on a tax deferred basis until you withdraw funds.
  • Withdrawal or Distribution: you choose how you’d like to withdraw funds from your annuity, either by “annuitizing” the value and receiving a guaranteed monthly payment, or by simply taking withdrawals as you see fit.  (more on this in a moment)

An immediate annuity has no accumulation phase.  You simply place money into the plan and begin receiving monthly income for life.  If you currently receive a monthly pension from your employer, what you’re receiving payments from is typically a form of an immediate annuity that your employer has placed funds in to guarantee your monthly payment.

Accumulation Phase

During the accumulation phase of a deferred annuity, there are two broad options:

Fixed Annuity:  When you invest in a fixed vs. a variable annuity, what they’re referring to is the “investment” element.  In the case of a fixed annuity, your deposit is credited with interest paid by the insurance company.  How much interest you receive is based on the performance of the insurance company who sponsors the annuity, so in that respect, it acts like a CD at the bank.  Typically, they come with a minimum guaranteed interest rate for the life of the annuity contract.

Variable Annuity: In a variable annuity, in addition to having a “fixed rate” option to choose from, you are also provided a list of subaccounts which act like mutual funds from various mutual fund companies.  There are no guarantees.  The performance of your plan will be based on the performance of the underlying subaccounts. 

Withdrawal or Distribution Phase

During the withdrawal or distribution phase, there are also two broad options:

Random Withdrawal:  When you want to begin receiving money from the plan, the first option, within a deferred annuity only, is to simply take random withdrawals subject to the deferred sales charge limitations set forth by your company.  For example, within most companies, you may not withdraw the entire balance of your annuity within the first six to twelve years without paying a hefty surrender charge.  However, prior to the end of that period, many companies allow you to take a partial withdrawal without any charge.

Annuitizing (Guaranteed Monthly Payment): When you “annuitize”, you are choosing to receive a guaranteed monthly payment for a period of time, typically for life.  In this case, it acts like a pension or the social security income you receive. 

  • Single Life:  When you select the single life option, you choose to receive payments for your life only.  When you pass away, even if that’s in three months, the insurance company keeps the money.  However, if you live to be 156 years old, the insurance company must continue to pay you the guaranteed monthly check.
  • Joint and Survivor or Period Certain:  If you have a spouse who you want to protect, or if the prospect of passing away too soon and having the insurance company keep your funds is a problem for you, you may select a joint and survivor or period certain plan.  By doing so, you guarantee payments to your beneficiary either for life or for a certain period of time after your death.  However, in order to compensate the insurance company for this added risk, you receive a smaller monthly payment while you’re living. 

Now that we have the basics down, we’ll continue with a discussion of the pros and cons of using annuities in the next edition so that you can evaluate them for your own use.

Stay tuned.

Beware The Fatigue Factor and Magic Pill Pushers When You Transition to Retirement

Confronting something that requires a greater level of focus can be physically, mentally, and psychologically taxing.  The longer that required focus persists, the more taxing it can become.

A potential negative byproduct of this can be a “fatigue” factor kicking in, and the common and costly mistakes that can follow as a result.

This fatigue factor has definitely been known to kick in during times heightened stock market volatility, especially if a) you were not prepared and properly positioned with a long-term system to begin with, or b) you still “check out the market” several times each day. 

Those who fall into one or both of these camps are a perfect target for the Magic Pill Pushers who always emerge during heightened stock market volatility environments. 

Magic Pill Pushers

You can set your watch to it.  Each time stock market prices temporarily plunge, the marketing departments of two industries kick into high gear with Magic Pill solutions:

  1. Gold and other Precious Metals
  2. Annuities

Each of these is marketed as the solution to the “problem” of the volatile and “risky” stock market.  Before digging a little deeper into gold and annuities, the first principle to always keep at the forefront of our minds is that any attempt to suppress short term volatility correspondingly suppresses long term returns. (You may want to take a second to read that again)

Gold and Annuities

The popularity of any non-currency-based asset like Gold always rises during turbulent markets and ensuing government spending as the fear of rising inflation enters the equation.  While a strong case can be made for the fear of inflation, gold has been a terrible investment for those looking to outpace inflation.  Fortunately, a fairly simple Google search can demonstrate this. 

The same can’t be said for the history of annuities.  If you have been a steady reader of RETIREMENT GAME PLAN over the years, you know my feeling about annuities.  While they do provide a tool in your planning toolbox, for the most part, the overwhelming majority of annuities marketed today are very complicated, expensive, restrictive, and they are grossly oversold.  (One of the reasons they are oversold is they pay very large commissions to agents and advisors who sell them.)

Here’s an example of language used in a Jackson National Life annuity advertisement on page one of the Wall Street Journal during a recent market correction acknowledging this reality:

“Sound too good to be true?  It’s important to remember that unlike any other investment product, annuities were created by insurance companies, which have the unique ability to offer features and add-on options that help protect us against outliving our savings or having to drastically change our lifestyle in retirement.”

And then:

“Annuities have been available for a long time, and it’s true that they can be complicated to understand and even challenging for advisors to sell in today’s regulatory environment. But that should never be a reason for investors or advisors to forgo consideration of something so critical as guaranteed lifetime income.”  (I have taken the liberty of bolding this last sentence)

Doesn’t the phrase “guaranteed lifetime income” sound so attractive?  Who wouldn’t want that???

What is omitted in this advertisement is the cost to you for providing this “guaranteed lifetime income.” 


“There are numerous annuity options you can choose that can be customized to meet your needs.  For example, some annuities start paying a lifetime income stream immediately, while others allow that income stream to be deferred to a time in the future.  And with the purchase of a lifetime income benefit, an annuity is the only investment that can provide a steady stream of lifetime income unaffected by market downturns.  In fact, that income even has the potential to keep growing.”

As all insurance companies do when they market annuities, they are preying on the average American’s fear of financial market corrections and volatility which is a very effective marketing strategy on their part. 

You simply don’t want to fall prey to it!

As we have discussed in great detail, market volatility and corrections are nothing to fear for the rational, long-term investor if you employ a strategic plan.  Not only are they not something to fear, but intelligent investors welcome them!

Jackson National Life recognizes these realities, so the ad attempts to deal with them. 

The bottom line is to always have your eyes wide open when reading advertisements like this, and to beware of “magic pill” offers especially during times like these when the “fatigue factor” can easily kick in!

As much as we would all love a “magic pill” as this Jackson advertisement attempts to imply, there is no such thing.

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Four Market Principles All Investors Must Adhere to in Retirement

I have some thoughts to share with you today to help you continue to be a better investor so you can live the life you’ve earned. 

An unfortunate but true outcome during sharp stock market corrections is the transfer of ownership of a finite and fixed number of shares from those who were not prepared, and thus panic-sell out of fear, to those who were prepared and confidently buy shares at a significant discount. 

You may want to pause and read that paragraph again.

Despite what the financial media and large brokerage firms convey, investing is not a reactive “market-oriented” activity, but a strategic and proactive “goal-oriented” process. 

And, that goal-oriented process is based on market principles that we all have to keep at the forefront of our minds in order to avoid the common mistakes that occur during challenging market conditions:

  1. Markets work and they are working.  Although we may not like the direction they take at times, the great news for all of us is that markets work even during crises, and information is incorporated into stock prices.  We always have to remember that for every share of stock that is sold on a given day, there is a willing buyer on the other side making that purchase. 
  2. Stock prices adjust to the point where a buyer believes they can earn a positive expected return from that point forward.  Nobody buys a stock with the expectation of losing money.
    1. Think of it this way as an example.  At $100 per share, a buyer may not be interested because he or she may not believe the expected return from $100 per share going forward justifies paying that price.  However, if the price drops 20% to $80 per share, there is a greater likelihood of the buyer earning the expected return they want to justify the purchase price. 
  3. Stock prices are forward looking, i.e. expectations about the future have already been incorporated into the price.  In today’s day and age, what are the chances that you know something that millions of other market participants don’t know about a company?
  4. Volatility is brought on by uncertainty.  If there was no uncertainty, there would be little or no return, i.e. treasury bills.  Your ability to deal with short-term uncertainty, and thus volatility, is precisely what allows you to earn higher expected long-term returns.

With those principles firmly in our minds, stay tuned for the next edition where we will discuss one of the most common mistakes investors fall prey to during sharp market corrections.

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How to Reduce Your “Investing Pain” in Retirement

Is it possible that two different individuals can have the exact same investment allocation over a 43-year period of time, yet one experiences almost three times more investment “pain” than the other?

At first glance, you might think this is impossible.  If two individuals have the exact same investment allocation and they don’t buy or sell anything for forty-three years, shouldn’t they both experience the same amount of investment “pain?”

The answer will likely surprise you.

We recently examined stock market price movements during the “Great Recession” financial crisis between October, 2007 and March, 2009.  What this revealed was that during that 18-month stretch, if you “looked at” and experienced stock market prices on a daily basis, in addition to a lot of down days (54% of the days), there were also a lot of up days (46% of the days).

So, during that memorable 18-month market crash in which prices fell almost 57% from peak to trough (as measured by the S&P 500 Index), we also experienced prices closing up on 46% of the days!

Among other things, what that illustrates is that when dealing with markets, our experience is never a straight line up or down.  Instead, it’s more like: up one day, down the next, down the next, up the next, up, up, down, down, down, up, down, up……

That’s how we experience markets.  But, only if we “experience” them on a daily basis.

How Often Do You “Look”?

How often do you “look” at “the market?”  Or, your investment portfolio?

Be honest!

With technology and the financial media today, it’s not uncommon for Americans to not only look every day, but multiple times during the day.

We have all been conditioned by the financial media to “look” so you don’t miss anything and get caught.

Unfortunately, this is leading to a lot more pain in your life!

During the 43 years from 1973 through 2015:

  • Daily: If you looked at and experienced “the market” on a daily basis, you experienced prices being up 53% of the time, and down 47% of the time.  If you add up all those days, you will have experienced “pain” (i.e. market prices closing down for the day) for 20.3 years out of those 43 years.
  • Monthly: If you were “busy” and only allowed yourself to look at “the market” on a monthly basis, the percentage of time you experienced “pain”, (i.e. market prices closing down for the month), fell to 14.5 years out of those 43 years.
  • Quarterly: If you had the discipline to only look at your Retirement Bucket of investments every three months, the percentage of time you experienced “pain”, (i.e. market prices closing down for the quarter), fell to 11.8 years out of those 43 years.
  • Annually: Finally, if you disconnected from all media for all but one day per year, the percentage of time you experienced “pain”, (i.e. market prices closing down for the year), fell to 7 years out of those 43 years vs. 36 years in which the value went up.

What this demonstrates is that two different individuals could have had the exact same investment mix over 43 years of their lives, yet the one who “looked” at it daily experienced almost three times more pain than the one who looked at it once a year (20.3 years’ worth of the pain of market prices being down vs. 7 years).

There are a few conclusions we can draw from this data.

First, if we choose to follow the financial media the overwhelming majority of Americans and look at market prices and our investment holdings every day (or throughout the day), we’re setting ourselves up for a lot of completely unnecessary pain.

As the statistics and our experiences confirm, if measured on a daily basis, market prices move up and down a ton.  However, if measured over the long-term (which is what you invest for in the first place), market prices and dividends have increased substantially over time averaging 7% per year greater than the rate of inflation.

Second, we can’t delude ourselves into thinking that looking at it on a daily, weekly, monthly, or even quarterly basis will make you more knowledgeable, provide you with any signals to act on, or produce better results.  

In fact, as Dalbar’s 2020 Annual Quantitative Analysis of Investor Behavior illustrates, the average investor’s real-life results are significantly lower than markets have performed (while the S&P 500 index returned 9.96% annually over the last 20 years, the average equity mutual fund investor earned only 5.04%.)

How much of that awful investor performance do you think is attributable to and exacerbated by poor investment decisions brought on by “looking” at market price movements on a daily basis?

I would suggest a lot!

Finally, this does not mean that you should never look at market prices or your investment holdings.  As I suggested last week, go ahead and do so but during pre-determined periods of time, i.e. once a quarter, half year, or yearly so you can assess and rebalance your holdings back to your originally prescribed mix if necessary.

However, once you do so, go ahead and put it all back “in a drawer” and go about living your life.  Not only has history demonstrated that you will have better investment results, but you will also live a more enjoyable life!

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

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

  1. You’ve determined just how dependent you are on your Retirement Bucket™ each year going forward (at least the next five years).
  2. 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 And,
  3. 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 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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The Ideal Investment Mix During Retirement

As we’ve discussed many times, investing during Phase II of your financial life, when your paycheck from work is no longer coming in, the stakes go way 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’ve set aside what not to invest during your retirement, 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 index funds, implement The 4 Ds:

  1. Determine: What percentage of your Retirement Bucket™ of Investments 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 during my retirement years?

  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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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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Evidence-Based Investing in Retirement: 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 investmentsystem” in place after you transition to retirement, which governs your decisions, the odds of earning market returns decrease, and odds of 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 system grounded in 3 Facts and 3 Principles.

3 Investing 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 dot.com 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 a 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 During Retirement

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 Ron and Rose, both age 62. To keep it simple using round numbers, assume each couple has:

  • $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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