Confidently Invest While Withdrawing From
Your Retirement Bucket™
Over the last few weeks, we’ve dissected The Relaxing Retirement Formula™, and most recently begun to answer the final question which is where do you position your investments to produce the long term rate of return you need to earn while experiencing acceptable levels of volatility and paying less taxes to the government?
Principle and Guideline #1 was knowing what NOT to invest, i.e. the amount you will be spending in the short run, and getting comfortable with the idea that not every dollar you have should be invested to earn top returns.
Principle and Guideline #2 was developing an answer to your binary question: Given the rate of return you need to earn in order to produce the lifestyle sustaining income given your unique circumstances and priorities, what percentage of your Retirement Bucket™ will you invest in ownership shares of quality companies (stocks) vs. fixed income investments including bonds, money markets, CDs, and fixed annuities? And, then, more specifically, what percentage of your investment holdings do you need to subject to different asset classes (“trains”)?
Now that we’re comfortable with the first two, let’s jump into Principle and Guideline #3 which pulls #1 and #2 together:
Withdraw Funds For Your Spending Needs Directly From Money Market Funds You’ve Already Set Aside, Not By Having To Sell Investments Each Month
The first point I’d like to convey is that this will not work for you unless you’ve carefully followed each step in The Relaxing Retirement Formula™ so far.
It will seem foreign and counterintuitive to you.
However, if you have, then you already know the amount of money you need to withdraw from your Retirement Bucket™ each year, and you’ve plotted out the amount you’ll need to withdraw over the next 5 years at least.
If you’ve done this, and you’ve applied Principles #1 and #2, then you can now confidently invest.
What makes us fear a down market is being forced to sell at the wrong time, i.e. when the price of your equity holdings are down.
If you follow this principle, and you carefully allocate money in short term instruments to support your withdrawal needs, you can confidently invest the rest like a pro knowing that you won’t be forced to sell equity investments to support your income needs when market prices are lower than you’d like.
You will already have the amount of money you need set aside.
When your equity holdings climb, as they have over the last few years, and your pre-determined fixed income to equity investment holdings ratio gets tilted too far toward equities, such as from 30% fixed income / 70% equity holdings (an example of a pre-determined ratio) to 20%/80%, simply trim back your equity holdings to 30%/70% and set most or all of the gains aside for your future withdrawal needs.
It’s only when you “have” to sell in a down market cycle that you run into trouble.
What this allows you to do is confidently spend what you want while you allow your inflation fighting equity investments to do their job in the long run.
This is the key to successful investing during your retirement years.
Don’t underestimate just how important this is. It works especially well during ‘temporary’ market corrections (or bear markets as we just discussed) when the overwhelming majority of retirees panic and feel as though the “have” to sell.
Committed To Your Relaxing Retirement,
The Retirement Coach
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I appreciate the trust you place in me. Thank you!
(The content of this letter does not constitute a tax opinion. Always consult with a competent tax professional service provider for advice on tax matters specific to your situation.)