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

Wednesday, April 3rd, 2019

Good Morning Relaxing Retirement Member,

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 determined the real 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™ to capture the returns of a globally diversified mix of asset classes 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 are relying on your Retirement Bucket to support your desired lifestyle and taking monthly withdrawals.

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

  • 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, Retirement Bucket Rebalancing is needed.

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 OBJECTIVELY.   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 a recent example, let’s contrast how you felt on two different days over the last four months:

  • 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 24th was your pre-scheduled day to rebalance your Retirement Bucket™, how committed would you have been to rebalance into more equities if you subjectively evaluated everything vs. objectively?

If you are like most Americans, you would have said, “you want me to buy more equities 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 equities of our fear.  And, of course, those who did missed the best first quarter in a decade.

How about right now 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 equity 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 equity 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% equity investments because equity 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 equity 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 equities (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 in your retirement years, 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.

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

Criteria and Guidelines for Rebalancing

Now that we’ve outlined Retirement Bucket™ Rebalancing, the next step is to establish your criteria and guidelines for rebalancing.

There are three major areas to consider which we will explore next week.

Stay Tuned.

Committed To Your Relaxing Retirement,

Jack Phelps
The Retirement Coach

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I appreciate the trust you place in us. 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.)