The ups and downs of the market make for an uncertain financial future for so many. It is all so complicated, and you’re getting conflicting advice.
What can be done?
There is a new common sense guide by David Vick called, “Bat-Socks, Vegas and Conservative Investing.” This book lays out two great approaches to money management for the retirement-minded: The ABC Planning Process and The Rule of 100. (Granted, you’ll still need professional help to employ Vick’s methods but at least you’ll know where to start, what to avoid and what makes sense for your circumstances.)
The ABC process helps you divide your money into color categories: Green, Yellow and Red. Just like the stop light at a busy intersection, at the dangerous intersection where working and retirement meet, caution is the watchword as carelessness can result in a lifetime of doing without, worry and regret.
Your green money is to be protected for use later in retirement. Nonetheless you’d like safety, growth, some liquidity just in case and deferring taxes on earnings would be nice.
Your yellow money should be ready for use without loss for everyday living or unexpected emergencies.
Your red money is for late retirement, after the green money is gone, and you may be willing to take some risk to get potentially higher returns. The key is not how much risk you take. The key is how safe you money is and how much time you can wait before you access it.
The trick is to know how much of each color is needed because each retiree’s risk tolerance, aspirations, circumstances and lifestyles are different. Determining the yellow money amount is straightforward and can then be kept safe in a bank deposit or other safe place. Unfortunately, many retirees put all their retirement money in low rate, highly liquid bank accounts as if all will be needed tomorrow. This may be a terrible mistake because the loss of earnings means less money will be available for later retirement. With a little objective thinking the yellow money percentage can be determined, but the tough decisions are how much should be green and how much red?
The Rule of 100 provides the answer
The Rule of 100 is a fundamental guide for conservative money management in retirement and says: red money should be 100 minus the age of the oldest spouse plus 10 , expressed as a percent. If this age is 63, then no more than 27% of the retirement money should be red: 100 – (63+10) = 27(%).
The world will not end if the target is missed by a small percentage, but unfortunately most retirees have too much red money because they manage as if they’re still working. Exceeding the red money limit at the intersection of working and retirement is dangerous because a market crash could derail your retirement journey.
- You have no way to make up losses and if you maintain your lifestyle the smaller nest egg will not last until retirement ends. Granted, if you have more than you need for retirement you might be able to tolerate losses, but the market does not telegraph the time, size or length of downturns. In David Vick’s view, it is better to avoid catastrophic losses in retirement than it is to hope for major gains. I refer to this as “The Principle of Regeneration” which is discussed in more detail in my blog about “The 12 Principles of Money“
Since determining the amount of yellow money needed is not difficult and the Rule of 100 gives you the right percentage for red money, what’s left has to be green. That said, you will likely need professional help in determining where to invest your money as there are so many choices where to keep your green and red money, and I don’t like most of them.
For example, red money can be in stocks, bonds, options, mutual funds, variable annuities, REITs, ETFs, but I’m not a fan. There is too much risk to your investments and no guarantees for growth. Rather, Red Money is well placed in IGRE’s (Investment Grade Real Estate) and CALI’s (Cash Accumulating Life Insurance). In these vehicles your money can grow safely, substantially and in a tax preferential manner
Green money investments include fixed annuities, indexed annuities, and more. If these choices are strange to you, this is proof positive you either need professional help or have homework to do.
You can find a copy of Vick’s book at www.lulu.com where you can instantly download a copy for about $9 or purchase a printed copy if you would like. I hope you’ll take the time to read this common sense approach to managing your money.
It’s a good life!
Randall A. Luebke RMA, RFC
PDF
