And So Then What?

For about twelve years I was focused very intensely on saving and investing for retirement. I had a target date in mind. My goal was to retire at age 62 or at an even younger age, although I knew that was unlikely.

I was one of the fortunate ones. I was able to dodge what Susan Bruno CPA terms the five Ds. These are the events that can land your family in a real financial jam.

1) Death
2) Divorce
3) Disaster (natural)
4) Disability
5) Debt

She observes that three of the five Ds can be covered by enough insurance. Divorce is almost always a nasty wealth destroying nightmare, but sometimes it happens. She views debt as the silent killer of a family’s finances. “The younger wives don’t want to know and the older ones are petrified to know.” (The Thin Green Line by Paul Sullivan)

I made it. I retired on the first working day after my 62nd birthday. A little over two years into retirement it is steady as she goes. Since I am worried about the possibility of a market crash in the early years of my retirement, I have decided to hold a rather more conservative position than most advisors might recommend for someone of my age.

Once a few years have passed, I can see that I am going to have to ask the question, “And so then what?” I look forward to taking some trips and finding opportunities to be a blessing in this unhappy world, but what am I saving for when I am no longer saving for a particular time sensitive goal? I have a number of relatives who have lived long lives. I am assuming a thirty year retirement, but who can say? I may die tomorrow. I may live to 104 like my grandmother. I certainly want to be a blessing to others long after I shuffle off this mortal coil. I can see that at some point in the future, I will need to plan for a future that I will not live to see.

As I grow older and as I have learned more, my opinion of low cost “target date” or “life cycle” funds has increased. For some time I have suggested Vanguard target date funds as a good option for people who don’t want to learn anything about managing money. The target date refers to your planned date of retirement. Feed that one data point to Vanguard and they will take care of the rest, maintaining an age appropriate mix of low cost index funds that will be automatically rebalanced without any further oversight or action required by the customer. Auto-debit additional deposits to this account on a monthly basis and let the miracle of compound interest work in your favor.

Recently, Schwab has offered a competing product, Schwab Intelligent Portfolios. As I messed around with their website, I realized the key component that I could no longer provide was the target date. There was no target date. I will need to tap money throughout my remaining years, but if I wish to plan for a future I will not live to see, at least a small portion of that money will need to be treated as though I was a thirty year old man planning to retire at age 65. I will need to create a sub-portfolio that contains a large percentage of international and small cap stocks. Normally someone my age should be looking at a portfolio based on a foundation of full faith and credit instruments like Ginnie Maes combined with intermediate term investment grade bonds.

As I pondered the question of multiple sub-portfolios designed for different purposes, I came up with the idea “laddering” target date funds in much the same way as bonds are laddered to smooth out fluctuations in interest rates. I share this idea with an Internet community of investors. They understood the problem, but several of the members pointed out that, since the target date funds use different proportions of the same products, multiple holdings would dilute the effect of several different target date funds into one fund with some intermediate target date.

Instead, they proposed thinking in terms of “buckets,” constructed to provide cash for today, conservative investments for tomorrow, and a third bucket containing something akin to a portfolio for a man in the latter years of middle age to provide the possibility of capital gains for the more distant future. One of the contributors in this discussion shared an article that enjoyed a good reception from most of the participants.

A Retirement Strategy for Nervous Investor

In the article, Norbert Mindel, author of Wealth Management in the New Economy, proposes a hypothetical retiree with a net worth of $2 million. Therefore, following the 4% rule, this retiree plans on spending $80,000 a year. Mindel recommends a first bucket containing $240,000 an amount equal to three years expenses. This money would be invested in market funds and short term certificates of deposit. When necessary this bucket would be replenished from a second bucket containing $500,000 containing 80% investment grade bonds and 20% in low cost index stock funds. The third bucket would contain $1 million divided 60% stocks and 40% bonds. The author reasons that, even if the market drops 40% as occurred in 2008, enough money would remain in the first two buckets to cover almost 9 years of expenses. This would likely be enough time for the third bucket to recover.

While I don’t think this article specifically addresses my question or my particular situation, I do think the concept of three or possibly four “buckets” is an idea with merit. It will be a few years before I will actually need to begin any significant restructuring of my investment portfolio. Today, safety is my primary concern, balancing income with inflation protection a secondary concern, and capital gains a tertiary concern at best.

However if I am fortunate, I can see that the day will come when it will be appropriate to restructure my retirement portfolio, not only to address my needs and concerns, but for the welfare of those who will follow in my footsteps.

As always, the time to start asking questions and planning for tomorrow is today.