The market has been giving many people very upset stomachs lately. How can you be in the market without taking antacids all the time?
If you do proper Retirement Income Planning you will have far fewer concerns over this roller coaster ride because you will know that you have a plan based on your real income and budget numbers along with your personal risk tolerance levels. If you think of your money being in different “Buckets” is easier to understand what “buckets” are for shorter term income and expense requirements and which “Buckets” are for longer term expenses. The longer the period before you are going to spend that money (5,10,20 years) the less you have to worry about losing some of that money temporarily versus money which you must have in the next 6 or 18 months
Bucket A is for short term expenses and this money must be SAFE ; you can’t afford any Losses or risk on this money so you should keep it in the bank: savings accounts; checking accounts; very short term CD’s;money market accounts and so forth. The key requirement of this Bucket A money is that it is liquid, don’t worry about growth for this money. If there is no risk on this money then your short term expenses will be covered and you will not worry about the near term.
Bucket B money is for Long Term expenses (5 to 20 or 30 years out), this bucket has two compartments in it: one compartment is for Risk money, that is money you invest in the market where you may lose any or all of your principal or interest(think 2001 or 2007-08 when people lost 40% of their market investments) and another compartment for safer money with historically higher returns than the bank has paid but less potential growth than the market money.
Why would anyone put their money at risk? Because your long term money must keep ahead of inflation or the purchasing power of your dollar is guaranteed to decline. For Example, If you put all your money in the bank earning a half of a percent or one percent while inflation goes up 2.5% you are guaranteed to lose 1-1.5% in purchasing power each year–remember that is a GUARANTEED loss. Now for short term money you are not concerned with that loss because you money is only going to be there to cover short term expenditures but if you put your longer term money into that position you won’t be able to keep up with the rising cost of food, housing, medical costs etc. The other compartment of that Bucket B money can be put into fixed guaranteed products which guarantee that you will never lose any principal of interest earned to date but allow you to participate in market gains. These products are not designed to compete with the market directly but rather to compete with safe types of savings but give you returns that will keep you ahead of inflation.
Risk Tolerance, How much of your money goes into the Bucket B compartment that is pure Risk and how much that goes into the safer portion of Bucket B depends upon you personal risk tolerance. To determine what your risk tolerance is we take the time to look at your overall financial picture as well as hold in depth discussions with you as to how you feel about monetary loss for part of your money and also use questionnaires which have been designed to generate risk percentages. For example a person who has a nice pension, social security income and a big pot of savings might feel comfortable with more risk than someone who has a small pot of money and no pension.
If you have any questions, comments or would like a personal consultation, please email: [email protected] or call our office at 860-263-8886.