Retirement Expense Planning - Allocation To Fixed Income And Cash

On November 17, 2007, I wrote about Pondering Financial Risks In Our Retirement, with a stock market crash or recession being a potential issue. Only two months later, I get to evaluate whether the strategy we developed is working.

For our case, we have funded four years of retirement expenses with short term fixed income investments and money market funds. Fifty percent is invested in CDs and municipal bonds that mature within the next four years, and 50% is in money market funds. While our equity investments have declined 8% in 2008 (and 10% from the peak), the fixed income part has risen slightly while paying 3.6% (tax exempt) to 5.3% (taxable) in interest. Our money market accounts are earning 2.9% to 4.3% respectively on tax exempt and taxable funds.

For reference, we started putting funds in fixed income investments in the summer of 2006, before we needed the money. At the time, the stock market was still doing well and interest rates were still increasing. I recall agonizing on locking in 4.5% for 5 years and missing out on stock market gains or subsequent interest rate increases. In hindsight, with January, 2008 wiping out all of 2007 and part of 2006 stock market gains, 4.5% returns do not look too bad anymore:-) In addition, we do not need to sell stock while the market is down in order to cover our retirement expenses.

At this time, the strategy of keeping short term expense needs in cash or short term fixed income investments is working. We have access to sufficient funds, and will not need to sell any stock, while the market is correcting. Hopefully, the market will recover before any stock sales need to be made for future funds:-)

For more on Reaping the Rewards, check back every Friday for a new segment.

This is not financial or investment advice. Please consult a professional advisor.

Copyright © 2008 Achievement Catalyst, LLC