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 (adjusted for inflation) 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 produce that long term real rate of return you need?

To help you determine the correct answer for yourself, there are FOUR principles and guidelines I recommend for you.

Today, I’d like to begin with Principle and Guideline #1:

How Much and When?

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.

Because you will be withdrawing money from your Retirement Bucket™ each month or each year, you can’t afford to have the funds you’ll withdraw 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?

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.

So, 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.

Several years’ worth of those anticipated withdrawals will then be strategically positioned in interest bearing and short term fixed income instruments free of the price volatility that comes with ownership of equities.

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.

That’s admirable for some, 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 pockets 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 also allows you to remain confident with the majority of your Retirement Bucket that is invested 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 a market correction to support those cash flow needs.

Stay tuned for Principle and Guideline #2 coming up soon.

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.)