Baby Boomers – How to Handle Financial Uncertainty in Retirement

Baby Boomers face financial uncertainty in retirement because the main source of money stops or is considerably reduced. Not only does this affect our pocket it also affects us psychologically.

Whether this is a positive or a negative depends on how we handle it. If we chose not to take control then we will be at the whim of the market and its henchmen – the wealth management industry that needs our money to sustain itself.

Unless you can find a financial planner who understands the difference between accumulating a nest egg and distributing one you will have to come up with your own strategy to protect your nest egg in retirement.

You can be one of the few that takes control and directs your financial planner to set up an investment strategy you are comfortable with, protects you against large losses, minimizes fees and let’s you sleep at night.

The hand-drawn model below is meant to be a draft model of how we might set up our retirement income so that we are buffered from the day to day market volatility and able to draw a regular income. It is not meant to be all-encompassing. My aim here is to show a possible strategy for handling financial uncertainty in retirement.

My Three Bucket Retirement Income Strategy Model #1

Protect Your Nest Egg Buckets Strategy_thumb[5]

How does it work?

The theory behind the model is that you need to insulate yourself from the day to day fluctuations in the market both financially and psychologically.

First you need to decide how much you invest in risk-based assets, then set your stop loss for each asset and forget about those investments and let the market take its course. You stop loss will take you out of the market if it triggers.

Next you need to set up an Income Ladder for your cash and fixed assets using CDs, term deposits and other fixed interest instruments. You need to set this ladder up so it will provide you with cash to live on for up to 5 years.

Last you need a bank account from which to draw your pension.

This way the Cash and Fixed Interest can act as a buffer between you and your higher return risk-based volatile investments such that you do not have to cash them in just to live when the market is down.

The Key:

  1. The Market siphon tube – This allows the market to fill your Risk-Based Assets bucket with profits or take some money out if the market is down.
  2. Inflation – This is an open pipe that is constantly draining and can increase or decrease and over which you have no control. Hence there is no tap to turn it off.
  3. Tax – This is an open pipe too. There are some things you can do about it but in the main it is just another drain on your Nest Egg funds.
  4. Fees – These you can certainly control and you should. Paying anything over 1% in fees during your retirement needs serious attention unless the returns are there. The tap can be turned either way to increase or decrease the fees.
  5. Re-balancing – This is a two way tape which you can adjust to decide how much to take out when you have profits or how much to invest when the market is down. The Teeter Totter Principle covers this idea very well and will keep you on the right side of the trade – Buy Low and Sell High.
  6. Withdrawal Rate – This is the percentage you draw from your Cash or Term deposits to live. If you have set up your Income ladder properly it should be a “no-brainer” to draw your pension and live in retirement without worrying about the markets.
  7. Stop Loss Adjuster – This is an important feature of the strategy. The number one thing to do in retirement is to avoid large losses. By setting this at about 10% before you exit the market you minimize the losses and give yourself the best chance of recovery once the market returns.
  8. Income Ladder – This needs to be set up for up to 5 years with retirement funds you do not need right away. As the retirement funds become available the strategy should be taking money from the risk based assets and putting it into the cash and term deposits bucket. There this money can become part of the income ladder.

I’d welcome any comments or even someone coming up with a better “strategy” diagram that can show Baby Boomers how they could smooth out their retirement income in a world of financial uncertainty.

3 Responses to “Baby Boomers – How to Handle Financial Uncertainty in Retirement”

  1. Donal O'Rourke says:

    David, I am now an avid reader of your site and thank you for earlier emails. I am currently reading through “The Buckets of Money” and wonder if you have developed your own diagram further. I am trying to focus on a combination of OTR, TTP and 3Buckets to create the broad context and then will try to decide on the long, medium and short term products with minimal expenses. Like in TTP, the simple illustrative diagrams speak volumes.

  2. admin says:

    Hi Donal,

    It’s good to see you back and finding value in my blog. Thank you.

    I have actually been drawing up a Model #2 of my little drawing above. I just started it on Monday. I’m trying to make it a little more professional.

    I will see if I can complete it over the weekend.



  3. […] is my latest retirement income strategy model #2. You can check out retirement income strategy model #1 and compare […]

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