Knowing What NOT to Invest

Good Morning Relaxing Retirement Member,

If you’ve been reading all of my recent issues of The Strategy of the Week and you’ve been following each step in The Relaxing Retirement Formula™ so far, you know just how critically important it is to determine the long term real investment rate of return you need to earn (as opposed to the rate of return you’d “like” to earn).

Once you’ve calculated the real investment rate of return you need to earn in order for your Retirement Bucket™ to remain full in spite of withdrawals you make each year to support your desired lifestyle, the next question is where do you position your Retirement Bucket to generate that long term real rate of return you need?

There are several principles and guidelines I recommend.  Let’s begin with the first one today which may surprise you.

How Much and When?

Unlike investing during your working years when you were not dependent on your Retirement Bucket™ to withdraw money to support your lifestyle, investing properly in your retirement years begins with first knowing what portion of your Retirement Bucket NOT to invest.

This may sound rather odd, but think about it.

You can’t afford to have the funds you will withdraw in the near future subject to any market volatility.

Why take the risk with that portion of your Retirement Bucket™ when you don’t have the time to recover in time to make your withdrawals?

As legendary 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, capital markets don’t always move in the direction we want in the short run, and prices temporarily fall 29% of the time historically.

If prices fall right before you need to withdraw funds to live on, 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.

As I’ve stated emphatically over the last few weeks, the first principle I recommend is getting crystal clear on the amount of money you need to withdraw from your Retirement Bucket™ and “when” you’re going to need to withdraw those funds.

In addition to allowing all dividends on your long-term equity holdings accumulate in your money markets, several years’ worth of your anticipated withdrawals will then be strategically positioned in money markets and short-term fixed income instruments free of the short-term price volatility that comes with ownership of equities.

This provides you with the confidence to remain fully invested with the rest of your Retirement Bucket through normal and temporary market turbulence. Maintaining this discipline drastically increases your odds of capturing the inflation-fighting long-term expected returns of globally diversified stock portfolios.

Psychologically, this is difficult for some folks to do 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™ to support your cash flow, but extremely dangerous and foolish in your retirement years.

As difficult as it may seem at first, it’s critical that you get comfortable with the fact that not every dollar you own will be invested earning “market” rates of return.

Instead, you’re going to have different sub-buckets of money which all have different goals, and thus different investment vehicles and asset classes in order to support them.

As we will discuss in the coming weeks, this allows you to remain confident with the remaining majority of your Retirement Bucket™ that is strategically positioned for the long term knowing that you have your cash flow needs covered for several years, thus removing the need or desire to sell during normal and temporary market corrections to support those cash flow needs.

Committed To Your Relaxing Retirement,

Jack Phelps
The Retirement Coach

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(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.)