"As you embark on the exciting journey into retirement, you will experience a transition that will be both thrilling and terrifying." Olivia Greenwell, So You've Retired
Despite our individualities, we all experience a time in our investment lives when we are especially sensitive to investment losses. We all must pass through the “Risk Zone” as we transition from working life to retirement. The Risk Zone spans the 5-10 years before and after retirement and is critical because our savings are at their peak. At this stage in all of our lives, we figure out what lifestyle we can afford in retirement. Whatever we’ve saved, it’s “enough” because it has to be. We figure out how to make it last. Losses sustained in the Risk Zone can destroy our plans, crimping our planned lifestyle. It can be shocking and demoralizing, making it a Bad Gamble.
This transition that we all have in common leads to a Lifetime Investment Master Plan (LIMP). The key to a comfortable retirement is to (1) save enough, and (2) invest it wisely. A wise investor will protect his/her lifetime of savings in the Risk Zone. A generic LIMP is shown as the Risk Glide Path in the following picture:
As shown in the picture, the Master Plan is to reduce risk through time in order to protect our growing pool of investments and then to re-risk as savings deplete in retirement in order to extend the life of our savings. This is similar to a Target Date Fund (TDF), but with some critical distinctions.
More Than a Target Date Fund
Everybody’s LIMP is personal and differs from a target date fund in the following ways:
- One-size-fits-all won’t do. We each need to create our own specific LIMP. The shape may be similar to that shown above, but we each need to decide on the risk that best suits us individually.
- We can create and manage our LIMP far less expensively than TDF mutual funds, especially if we use low-cost ETFs.
- We need to be able to change our LIMP in response to life’s events, including investment gains and losses. A plan is a plan until it changes.
- TDFs do not re-risk in retirement. A re-risking, coupled with a sound spending policy, is a good plan for our retirement years.
In a nutshell, a very special type of do-it-yourself target date fund provides a solid Lifetime Investment Master Plan.
Protect Yourself Now
Develop your LIMP now. Despite their popularity, TDFs and IRAs are ticking time bombs that could destroy the lifestyles of those in the Risk Zone when the next market correction occurs. Shockingly, risk has increased since the 2008 lesson that wasn’t learned. This is a shame, but you don’t have to let it happen to you. 75 million Baby Boomers are currently in the Risk Zone. If you’re one of them, LIMP to safety now. If you’re not a Boomer, you may come through the next market correction OK. Non-Boomers have come through the 2002 and 2008 crashes relatively unscathed, and so it may be in the next correction.
Protect yourself against sequence of return risk.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I am a sub-advisor of the SMART TDF Index and the originator of the 1st and only Robo Analyst that integrates Age with Risk. Please visit my Blog at seekingalpha.com/...
Age Sage builds better asset allocation models that help Baby Boomers transition through the Risk Zone that spans the 5-10 years before and after retirement. Implementation of these models can be done for less than 6 basis points. Boomers are poised for a sucker punch that they’ll never shake off.