Protecting Your Nest Egg in Retirement Restated

From some of the emails and comments I have been getting it is plain to me I need to redefine what my blog is about.

This blog is all about how to protect your retirement nest egg if you have one when you are close to or actually in retirement. Rule #1 is avoid large losses in retirement. If you have many years to go then you should consider putting a bigger percentage of your nest egg into risk-based investments like equity funds or stocks once the market settles down again. This blog may not be of use to people far from retirement right now.

Even though much of the information is sourced from the US (this is because so much more is available) the information is applicable to retirement nest eggs anywhere in the world where people are now responsible for their own retirement.

There is a major difference between investing to accumulate your nest egg whilst working and preserving your capital in retirement so you can draw a pension. The math of distribution or de-cumulation are totally different to accumulating your nest egg.

There are two main differences. The first is are you are not adding to your nest egg each month. It now becomes your capital which you need to maintain in order to take a pension. The second is you are taking money out as a pension each month to live on. These two things completely change the dynamics of your nest egg the moment you retire and cease to have a major source of outside income.

This doesn’t happen in a vacuum either. Inflation, fees and stock market movements continue just the same. If you have risk based investments you will be well aware of the ups and downs of the markets and how this can change the value of your nest egg. In a worse case scenario you may accumulate losses that mean you should not take a pension that year or maybe the following few years as well. But if you rely on this pension to live then taking it will adversely affect your capital base used to generate profits to allow you to keep drawing a pension.

What this blog is also about is suggesting ways to buffer yourself from a down market which might force you to sell equity funds at the wrong time. This could be done by creating an income ladder of safe investments that may not provide high returns but will give you regular income whilst the stock market sorts itself out and hopefully turns bullish again. You won’t get the high returns but the ride may be smoother and you may be able to plan your retirement better and not get too upset about any losses.

Having safe investments as well as risk based investment makes sense and may be good for your health in the long term. Watching your nest egg lose 40% of its value and then having to sell depressed equity funds at 40% loss or more is not good for the heart or the mind of a Baby Boomer in my view. So you need to find ways to avoid doing it. The relative safety of Bonds or Term deposits are some of the ways to invest safely to pay yourself a pension during the stock markets bad times. It might be worth remembering the stock market goes up, down and sideways. You only make money when it goes up. Since 2000 the S&P 500 has returned about 2.5% per annum. (Sorry for using averages here but I’m using them to say the market has basically gone sideways and that’s all).

In 2003 it was becoming obvious to many that a bull market was beginning. Fund managers were loading up their portfolios and the shear weight of money going into the market was driving the Bull. It was a relatively safe time to get into the market riding on the back of the professional money. I’m sure market opportunities like this will happen again in the future. When they do you may want to increase the percent of your nest egg you have in risk based assets and that is the time to do so. I’m definitely not advocating against doing this. In one of my trading books it said “You have to know when to be a pig”. When the market has established the beginnings of a new Bull it’s time to be a pig.

But in retirement you should still only risk money you can afford to lose or only a small percentage of your nest egg. I reckon no more than 30% seems about right for me. Plus I’d use a 10% stop loss on any investment even then. Your risk tolerance may be different to mine but you must relate it back to the size of your nest egg and how much you can afford to lose without jeopardizing the pension amount you need to live on. Anything less is gambling.

This is where Greg Heiple’s Teeter Totter Principle can come in really useful. Using it can keep you on the right side of the market and in balance and force you to take profits from the stock market and put them in safe investment to prepare for the next inevitable market down-turn.

What happens if despite all your efforts you are in danger of running out of money when in retirement? Then you may need to decide at what point you should purchase an annuity. This is not a dirty word but a last resort so you do not become a burden to your kids and should be considered in any retirement income strategies.

So in summary my primary aim here is to make Baby Boomers aware that their nest egg is a fragile thing and needs to be properly protected and managed at all times to ensure its ability to provide a pension to you is maintained for the long term. Increase risk based investments when the probability of success warrants it otherwise keep the bulk of your nest egg in safe investments and wait for the market to come to you.

2 Responses to “Protecting Your Nest Egg in Retirement Restated”

  1. […] David Kindervater wrote an interesting post today onHere’s a quick excerptThis blog is all about how to protect your retirement nest egg if you have one when you are close to or actually in retirement. Rule #1 is avoid large losses in retirement. If you have many years to go then you should consider putting a … […]

  2. make money online…

    Great post! Looking forward to many more……

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