Today I want to talk with you about getting ready for retirement. I’m going to bet that most of you are still working and haven’t retired. Even if you’ve already retired this post will be valuable for you.
Since 1999 there’s been a problem that we’ve all had to deal with. And that problem is the volatility that we see in the stock market. Many of us are scared to have our money in the equity market. That’s too bad, because history has shown that having a reasonable allocation in stocks helps us live through retirement more comfortably.
The new, new.
Here’s something that exists today that the people considering retirement didn’t have to think about 50 years ago. Our life expectancy keeps getting longer. If you’re alive at 65 years old there is a very good chance you’re still going to be alive at 85 years old.
That means that you’re going to have to think about having your retirement savings last for llonger than you probably thought you would when you were in your 30s or 40s.
Here are some ideas that might make having a long life work well and be one that you’re happy with.
What you can do about this.
You can think about organizing your investments in a different manner. I call this different manner the bucket system. The bucket system has three parts to it.
- The first bucket is cash and cash equivalents. This is the money that you’re going to spend over the next three years. So if you need $50,000 per year to spend you’re going to have $150,000 in your cash bucket.
- The second bucket is bonds and fixed income equivalents. This bucket is designed to help you make it through years four through six of your retirement. Sometimes you’ll spend this money, and sometimes you let it ride. But, if the market really turns against you, there is money that you can spend for the first six years of your retirement. This bucket will also have $150,000 in it.
- The third bucket is the equity bucket. In this bucket you put the rest of your investment money. This bucket will have its values rise and fall with what the stock market is doing. Sometimes the account will be way up and we’ll take money out to put it in our other two buckets and sometimes the market will be way down and will spend the money in our first two buckets. The key here is to help you stay invested when the market turns against you.
Why this works.
Here’s the reason I believe this works so well. We all have the tendency to get very worried when the market goes down and all of our investments are in one bucket or investment account.
Instead, we now have three buckets. Our first bucket doesn’t fluctuate very much, it’s filled with cash and cash equivalents. Our second bucket will fluctuate a little and it’s filled with fixed investments. That means for six years we don’t have to think about what’s in our equity bucket.
Once a year you’re going to sit down with your planner and you’re going to decide how you should reallocate the money in all three buckets. If the markets are up, you’ll reallocate from your equity bucket. If the markets are down, you’ll leave your equity bucket alone and reallocate from your bond bucket.
The whole purpose of this strategy is to help you stay invested during market volatility like we’ve had since 1999. Who knows if market volatility will stay with us or go away? It doesn’t matter, were set up with our investments to handle what has historically happened in the market.
Have a good thinking partner.
The key to making the strategy work is to have a great thinking partner. Your thinking partner will help keep you calm when the markets are volatile and going down. Your thinking partner will keep you from getting too excited when the markets are up and it looks like it’ll stay that way forever.
One of the roles your thinking partner needs to take is to help you stay away from what’s called recency bias. What this does is help you understand that what’s going on the markets today won’t last forever, whether it’s good or bad.
So what you think? Does a bucket system makes sense for you? Do you see a bucket system for you in the future? Why don’t you click here, send me an email and tell me what you think.
**Using reallocation as part of your investment strategy neither assures nor guarantees better performance and cannot protect against loss of principal due to changing market conditions.