Disclaimer: like all our blog posts, the following is for informational purposes only. It is not intended to be actionable financial or investment advice. To determine if it’s right for you, contact your financial planner.
If you’ve paid attention the last two weeks, you’ve learned that:
If you’re invested wrong when you first retire and the markets go down, you could easily find yourself unretired very quickly, because you suddenly can’t afford retirement.
The wrong way is keeping the same portfolio you had before you retired, but with less risk (ie more bonds, less stocks).
The right way is using retirement “buckets”. There are only two buckets:
Sounds pretty simple, right? It is.
The reason you divide up your money into different buckets is because each bucket has two different goals.
It’s impossible to protect AND grow your money at the same time. That’s why you can’t keep the same portfolio you had before you retired. Back then, you were ONLY growing your money.
The value of cash and bonds don’t go up and down. Except for the small chance of bonds defaulting, you know exactly the interest you’ll earn and how much money you’ll have when the bonds mature.
This is what will be paying your bills for the next 15 years, so you want it invested nice and safe.
I can hear you asking, “If it’s nice and safe, why don’t I put all my money in cash and bonds?”
Great question! And it has a one word answer: inflation.
Historically inflation depletes your spending power at 3.74% per year. In 2017, a portfolio of cash and bonds will earn about 3.74% year, just keeping pace with inflation. So none of your money is actually growing.
If you’re sitting on a pile of money so high that you can afford to earn a 0% real return (a real return is your return after inflation) and still make it last a lifetime, then good for you!
If you’re like the other 99% of us, you need to grow some of your money to stay ahead of inflation.
Enter Bucket 2, your growth bucket.
Bucket 2 will have good years and bad years. When it has bad years, you just ride it out and don’t touch the money.
When it has good years, you trim off the gains to replenish what you’ve spent from Bucket 1.
And safe retirement investing is just that easy.*
*Word of caution: for the purposes of this post, I’ve vastly oversimplified this concept. Below is a list of some of the additional things you would need to discuss with your financial planner: