Principle & Guideline #3: How to Invest AND Spend With Confidence

Good Morning Relaxing Retirement Member,

Over the last few weeks, we’ve dissected The Relaxing Retirement Equation™, and most recently began to answer the final question which is…

Where do you position your investments to produce the long term rate of return that you need to earn while experiencing less 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 ALL of your money will be invested to earn top returns.

Principle and Guideline #2 was the understanding that all investments have merit for somebody, buy not necessarily for you.  Given the rate of return you need to earn due to your unique circumstances and priorities, what percentage of your investment holdings do you need to subject to different asset classes and investment styles (“trains”)?

Now that we’re comfortable with the first two, let’s jump into Principle and Guideline #3 which pulls #1 and #2 together:

Plan on Withdrawing The Income You Need From the Fixed Income Side of Your Investments, Not Your Equity Investments!

The first thing I’d like to convey is that this will NOT work for you unless you’ve carefully followed each step in The Relaxing Retirement Equation™ 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 (your investments) 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 having to sell at the wrong time, i.e. when the price of your equity investments are down!

If you follow this principle, and you carefully allocate enough money in short term instruments to support your withdrawal needs, you can confidently invest like a pro knowing that you won’t “have” to sell equity investments when market prices are lower than you’d like to support your income needs.  You will have the amount of money you need already set aside.

It’s only when you “have” to sell that you run into trouble.

What this allows you to do is confidently spend while you allow your inflation fighting investments to do their job in the long run which is the key to successful investing.

On the flip side, when equity markets are up, thus tilting the weighting of your pre-determined allocation too heavily in equities, free up future cash flow at the same time that you reallocate your holdings back to your pre-determined mix.

Don’t underestimate just how important this is. It worked especially well when market prices dropped like a rock from September 2008 through March 2009.  And, it has worked even better since when market prices have recovered.

Next week, before jumping into Principle and Guideline #4, we’re going to tackle a problem that still rears its ugly head for many people in retirement, and I have discovered that it’s creeping back into popular mindset!

Stay tuned!

Committed To Your Relaxing Retirement,

Jack Phelps

The Retirement Coach

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