Painting Yourself into a Corner, as Applied to Retirement Planning

One of the funnest, most difficult parts of my work is coming up with language to help clients understand concepts that tend towards the not-so-easily-understood side of things. Because, even though I often rail against the financial services industrial complex (the FSIC) for the jargon it uses, and for its complexification of things, the underlying reality is that some of the ideas upon which a person's financial health rests, unfortunately, tend to be complex.

Here, then, is some new language/imagery I've been working on to help simplify and explain portfolio design generally, and, more specifically, how to design a portfolio to generate cash when that's what it has to do for you.

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When you fly into SFO on a clear day, and are on approach, you are apt to see out the window (if you're on the correct side of the plane) another plane that is startlingly close, paralleling your plane's approach. It has to be a clear day because on foggy days (which are most of them), the powers-that-be do not allow parallel landings, but on a beautiful day (like today) you will just about always be landing in parallel with another plane.

Now what you can't see from the plane, but which you can see if you are, say, coming up 280 and looking over at the airport from way up above in the coastal hills of The Peninsula, is that there are just about always three or four planes coming in on the same flight path, nicely spread out for, say, a landing every five minutes.

So on a clear day, there might be eight different planes approaching, all in rows, all spread out, each to come in at the right time, coming in two-by-two-by-two-by-two, for a nice 2 by 4 configuration.

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A person's stored-up money should be designed along the same lines. That is, it should have a bunch of different chunks, all lined up, ready to do what they are destined and designed to do, at their given time.

More specifically, when the time comes for you to start using your stored wealth to replace your paycheck and support your lifestyle (what the heck -- I'll use my normal language, and stick with the transportation motif: when you need cash to float your boat), you should have chunks of stored-up money that are lined up, on approach, ready for landing, with a chunk landing roughly every five years.

In this imagery, "landing" is equivalent to "in cash and ready to be used to float my boat" while "lined up and on approach" is equivalent to "close enough to cash so that, regardless of what the stock market does during the next five years, the dollars in this chunk will be worth something very close to a dollar (maybe even a tad more), and I therefore won't have to be counting on lucky timing of stock sales to have a nicely floated boat."

For instance, if you are saving for retirement, then as soon as you are, say, ten years or less away from the moment at which you need to start taking withdrawals from your stored-up money to replace your now-gone paycheck, you should have at least one, or better yet two or three, chunks of money on approach, lined up for landing.

Here that means that you should have sufficient money in bonds or CDs or something else that is close to cash, or even good ol' cash, to last you a full five years. And then, just like the planes, as one chunk lands (i.e., is in cash), you should have one or more other chunks on approach. You would then design one of those chunks still on approach to be ready to go (i.e. in cash or near cash or maybe bonds) about five years from now; it should also be large enough to last you five years once you start using it. And at the same time you would also design another chunk to be ready to go in about 10 years, and to also last for about five years once you start using it.

Think of it this way:

The ten year money is cruising at altitude.
The five-year money has the flaps down and is descending.
The zero-year money has the landing gear down and is about to smoke the tires.

Got it?

Good.

* * *

Now let's get even more specific here. The first chunk -- the chunk that is landing -- would be cash, and it would be a big enough chunk of cash to last you five years (including the after-tax interest, paltry thought it might be, that the chunk generates during those five years).

At that same time, the chunk that is five years away from landing would be in bonds. And as it gets closer to landing, you would change that chunk over to be closer and closer to cash, e.g., it could be partially in corporate bonds (the stocky part of the bond world) when it is five years from landing, but when it is, say, two years from landing it should be in more boring government bonds (read: the less likely to lose value part of the bond world -- the bondy part of the bond world).

And the chunk that is ten years away from landing would be in stocks, but you would be keeping your eye out for a good time to convert some or all of those stocks to bonds well before the five-years and counting mark.

About two months ago, for instance, was one of those periods where a lot of people -- me included -- were saying that anyone thinking about raising spendable cash via stock sales should be moving faster rather than slower in doing so, because the stock market had been going up, with barely a pause, for more than a year, and because, like Icarus, that sort of high-flying rarely lasts without a big pause or a big drop.

So that was a good time to bring some of your ten-year money (stocks) down to five-year money (bonds, but the usual idea of putting the proceeds of stock sales into bonds was less of a no-brainer than usual as a result of the very low interest rate environment we are experiencing and The Vice Versa Rule, which states that when interest rates start going up, the value of your bonds will go down).

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To not do this -- to not have your planes on approach, staggered and coming in for their respective landings every five minutes or, less visually but more accurately, to not have your portfolio chunks on approach, staggered and coming in for their respective landings every five years -- is to paint yourself into a corner (to add yet another image).

That corner -- the one from which it is hard to escape --- is this: you find yourself needing to raise cash for spending, but the stock market has just retreated 10% (as it has done in the past two months) (or retreated 20% or 30% which it does on a fairly regular basis, or . . . or retreated 60%, which it did in 2008/2009), and although you would really, really, like to not have to sell at 90% prices (or 80% or 70% or 40% prices), alas, you are stuck. Your plane has to land, even it if is not the right time to land. So you find yourself selling stocks, even though you are pretty sure it is a rotten time to be selling.

You painted yourself into landing your plane before you started the descent, before you put the flaps down, and before you put the landing wheels down. It's gonna be a very rough landing. Ouch.

* * *

As you think about retirement planning, then, or, for that matter, any other financial planning done in contemplation of needing to take withdrawals from your portfolio (age-based 529 plans for college funding work like this as well), please keep in your mind's eye the planes on approach at SFO, coming in two by two by two by two, all staggered and staged, so that one can come in after another after another after another, each in its own time, each with its own specific role to play, each to support your overall financial health, and each to help you avoid an unfortunate viewing, from your perch in the only unpainted corner of the room (which is nowhere close to the door), of your financial health going through a forced landing, directly from cruising altitude and at cruising speed, and all without the considerable benefit of landing gear.

'Til tomorrow then, here's to your financial health, and may it continuously improve.

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