The Perfect Financial Storm: Are You and Your Retirement Portfolio Prepared?
For more than thirty-five years, I’ve been helping people invest so they can enjoy smooth financial sailing throughout their retirement years, through all kinds of financial storms. It can be done. But like any successful journey, it requires a good map, smart navigation, and a sensible route.
You see, many investment plans can deliver great retirement income if the economy is booming. But the income strategy you’ll discover in this book has delivered consistently, regardless of what the economy has done. How do I know this? Because I’ve looked at every single rolling forty-year time frame since 1930, and I can tell you the plan you are about to see passed the test of time for investors like you, who need a worry-free income for life.
Why are those time frames so important? Because that’s how long you need your money to last. Whether you want your portfolio to generate income for forty years or not, you need to know that this plan has weathered every storm the market has seen in the past ninety years to provide a solid, consistent income stream.
Not only do I want you to have a plan that stands the test of time, but I also want you to have as much income as possible so you can embrace life and enjoy your retirement years to the fullest. I want you to do the things that matter to you while you’re still able to do them, without running out of money in your later years. It’s a tricky balance. Finding the right balance means you’ll have peace of mind as you enjoy your retirement now and for the rest of your life … without worrying about money.
Just like a well-planned journey, the right investment plan is based on an understanding of how to allocate your resources among the various options available to you. You won’t need a cruise ship to take your grandson paddling around the lake on a Sunday afternoon, nor would you want to cross the ocean in a canoe. Knowing how much energy—or cash—to allocate to each type of vehicle will help you survive the perfect storm, whether you’re 1,500 miles out at sea or fifteen years into your happy retirement. I’ll show you exactly how to build your portfolio using the right investment vehicles in the right amounts for smooth sailing—and a worry-free income for as long as you need it.
Finally, any good plan includes a strategy for dealing with challenges if and when they arise. The thing is, the financial market is not all sunshine and gentle waves all the time. There are times when stormy weather rolls in, and the market suffers a major setback. The All-Weather Retirement Portfolio is strong enough on its own to enable you to ride those out … nearly every time. But if a severe downturn happens during the first eight years of your retirement—right after you stop putting money into your retirement accounts and start taking money out—it could spell real trouble, because that’s when your sustained income is most vulnerable. If that downturn becomes what I call a “perfect financial storm”—an event so severe it’s happened only three times in the past ninety years—you’ll need to know how to handle it. Don’t worry: I’ve got you covered. I’ll show you what to look for and when to drop anchor if one of those rare storms hits. More importantly, I’ll show you when to raise that anchor and continue on as if nothing had happened.
Of course, none of this is an absolute guarantee of future financial security—such a thing does not exist. But I think you’ll agree that the research I’ve done makes a powerful case for the strength of the All-Weather Retirement Portfolio. That’s the value of testing it against every financial storm the market has seen since 1930.
Perhaps the following story will show you what I mean.
When Linda came into my office, she was a picture of health. She was sixty-two years old and had worked twenty years for a company that had been bought out by a larger corporation. New management had come in and wanted to make the company “more efficient.” This meant downsizing, consolidating jobs, and working employees harder and longer with less pay. Linda found she didn’t enjoy getting up and going to work anymore. She was ready to retire.
She wanted to know her options. Like most people in her position, she wanted as much income as possible to spend and to live comfortably. On the other hand, she didn’t want to run out of cash.
She had done some research and learned a bit about certificates of deposit, stocks, bonds, mutual funds, annuities, and Treasury bills. She’d read magazines, newsletters, and books, and listened to gurus, brokers, and advisors on TV and podcasts. They all had advice, and it all looked pretty good. And everyone had something different to say.
Most of the advice was all about getting the best return . But a voice inside her head said, “If it sounds too good to be true …” And what about risk?
At the other end of the scale was advice that was geared completely toward safety. That seemed sensible, but she knew she couldn’t live on the meager amount of income those recommendations would provide, and they didn’t seem to protect her against inflation .
What to do? Linda was an intelligent woman with a lifetime’s experience in a lot of different areas, but investing wasn’t one of them. She understood there were many variables to consider, but she knew she didn’t have the knowledge to evaluate them all. Stocks , bonds, mutual funds, certificates of deposit … the effect of world events on the economy, interest rates, and the stock market—it all seemed pretty overwhelming and made her feel uncomfortable.
She shifted her weight in the chair across from mine, thought for a moment, sighed, then looked me straight in the eye. “Now that I’m finally ready to retire, I want to be able to enjoy myself. The last thing I need is to have to worry about all this investment business, and I certainly don’t want to worry about money every time I think about going out to dinner,” she said. “I want to travel, spend time with my grandkids, volunteer with the youth groups at the Y… there are so many things I’ve been looking forward to.” She stopped. She was thinking about her dream retirement. “Heck, I’ll probably be busier when I stop working more than I am now. I’d sleep a lot easier if I felt confident that I’d have a nice, steady income for the rest of my life—enough to be able to spend money on the things I’ve been looking forward to for the past twenty years.”
She leaned in. “Can you help me with that?”
“Yes, Linda, I can,” I answered.
I explained to her that there are two approaches to investing: investing to accumulate wealth and investing for dependable income. Choosing the right approach was all about matching her investment strategy to her needs at this time in her life.
The first approach is the one that usually comes to mind when people think about investing: They think about a plan aimed at building a large nest egg with enough money to become financially independent. They think of big killings in the stock market. This kind of investing can yield high returns, but it also involves great financial risk. If you’re young, have many earning years ahead of you, and can afford a big potential loss, maybe that’s appropriate. But as Mark Twain said, “There are two times in a man’s life when he should not speculate: when he can’t afford it and when he can.”
Since Linda was coming to the end of her employment years, she couldn’t afford to risk her life savings. She needed to look at the second kind of investing: investing for income. In other words, she needed to invest her money in a way that would give her the best possible opportunity to have a worry-free income for the rest of her life.
I understood her needs and her concerns. Over the years, I’ve heard them thousands of times, and I’ve spent much of my career researching the best strategies to address them. I explained to Linda that, based on decades of experience working with retirees just like her, I knew I could help her with an investment strategy that was right for her.
She seemed to relax a bit. “That sounds like what I’ve been looking for, Randy,” she said. “I don’t need any fancy bells and whistles at this stage of my life. I just need a steady, reliable income. So what’s next? Where do I put my money so it will work for me?”
I explained, “You begin by focusing on the investment vehicles that give you the right balance between risk and return, then you use them in the right way. Just like a good travel plan, a good worry-free income strategy starts with the right vehicle. I use mutual funds.”
“I’ve read about them. But honestly, it’s not clear to me exactly what they are,” she said.
“That’s OK; I can help you with that. What’s most important for now is that you understand what you’re doing and why,” I responded. “Mutual funds are a way for you and many other people to pool your money into a single fund and let a professional invest it for you in a variety of different stocks or bonds or both. When you’re part of a larger pool of money like that, you have buying power on par with the big boys. At the same time, you avoid the risk that comes with putting all your eggs, or dollars, in one basket, as you would if you were using all your money to buy a single stock or bond.
“For example, when you invest in a company’s stock, you own a piece of that company—it’s a tiny piece, but it does mean you actually are one of many, many owners. If the company’s stock goes up, you do well. Invest in the right one at the right time, and you can make a killing. Then again, if the company you own stock in goes under, you lose that money you invested.
“If a company you own stock in goes belly-up, it doesn’t affect you nearly as much if you own it inside a mutual fund. That’s because you may have five hundred or more other stocks inside the fund to make up for the loss, or at least to water it down. With mutual funds you lose the chance for the big killing, but you gain staying power.
“When it comes to investing at this point in your life, Linda, it all starts with choosing the right vehicles, like mutual funds,” I explained.
“That sounds simple enough,” she said.
I chuckled. “Great! But it does get a bit more complicated. There are thousands of mutual funds out there, with different types of assets and different levels of risk and reward. The real key to success is knowing which types of funds to choose and in what proportions. It’s a little like a food recipe. If the recipe calls for a half teaspoon of salt and instead you put in two tablespoons of baking powder, the result will taste awful. If you’re just learning to cook, you can start from scratch and test various formulas, make some mistakes, learn from them, and finally come up with a great recipe. Or you can examine what others have done and follow their recipes. Even better if you use recipes from the most famous, most successful chefs in the world. Their time-tested recipes work again and again, and you get to enjoy the results.”
Linda laughed. “Oh, Randy, if you only knew—I love to cook, and I love to play in the kitchen. Just don’t ask me to stick to a recipe—that’s no fun at all! Sometimes I get great results. But believe me, I’ve had my share of disasters!”
I smiled and nodded. “Well, the successes certainly sound like lots of fun, and I’m sure you’ll be playing in the kitchen a lot more when you have more time to enjoy it. But I know you’re not interested in playing and improvising when it comes to your money. An investment recipe tested against decades of data will save you time, money, and potentially a great deal of heartache.
“Let’s take it one step further. If you do cook with a recipe, the one you choose depends on whether you want breakfast or dinner, right? Well, it’s the same with investing—choosing the right strategy depends on whether you want to accumulate wealth or provide yourself with a reliable income.
“Have you had enough, or would you like me to keep going?” I asked.
“Please keep going. But first, there’s something I don’t understand. Why is investing for income so different from investing for wealth? If I get a good return , won’t that take care of all my problems?” Linda asked.
“Great question.” I answered. “I’ve touched on investing for wealth when your return on investment is your primary concern. But the vehicles that provide the best return often carry the greatest risk. When you focus on return alone, you could be in danger of losing the money you invested in the first place. I like to quote Will Rogers on this one. He said, ‘I’m not as concerned about the return on my investment as I am the return of my investment.’ Investing for income takes both into account—risk as well as return. That’s why it’s different from investing for wealth. It’s a plan that allows you to enjoy your retirement without worrying about your money.”
Linda sat back and smiled broadly—she realized this was a plan that made sense for her needs at this pivotal moment in her life.
And for this pivotal moment in your life, I’ve prepared this guidebook to help you plan your own course. In the coming chapters, we’ll take a closer look at why the strategies for investing for income are the ones that make sense for you as you enter your retirement years. We’ll also look at the nuts and bolts of investment vehicles so you’ll have a better understanding of what you’re buying and why. Most importantly, you’ll find a simple, market-tested strategy for investing successfully to generate an income that will sustain you for the rest of your life—even if the market goes south and you need to ride out a “perfect storm” in the national or global economic climate.
But first things first. Let’s begin by taking a look at where you are today. What preparations have you made? What strategies have you already put in place? Are they the best ones for you? Where do you need to make some changes to set you on the best possible course?
Turn the page, and we’ll start exploring the answers.
