Monday, December 22, 2008

Timeless Financial Strategies that also Work in Early Retirement

"It's deja vue all over again." ~ Yogi Berra

The financial world is similar in some ways to the early 1980s, when I started my career. The U.S was in a recession, and stocks were an underpeforming investment. The differences were interest rates and inflation was much higher, being in the teens. However, the financial strategies that I developed and used then still seem relevant today. Although I retired early in 2007, I still hope to live at least another 50 years, requiring that we still have long term financial strategies.

Here are the strategies from 25 years ago that we will continue to use today and in the future:

  1. Have an emergency fund as a buffer. In the 1980's, the buffer was our savings, which I regularly added to each month with a philosophy of "paying myself first." Now that we are retired, we're no longer saving. Instead, we have put five years expected expenses in cash and cash equivalents, which could be viewed as a very big emergency fund :-)

  2. Allocate according to risk tolerance. Being conservative, my spouse and I have kept the majority of taxable account savings in CDs, bonds and money market funds. In the 1980's, I fortunate to get five year CDs at interest rates of up to 14%. Today, we're lucky if we can get 4% interest rates on five year CDs.

    While we have not earned as high returns as being invested in the stock market, we don't experience types of declines that happened in 2008.

  3. Take risk only if one can accept downside volatility with the funds. We only invest funds in the stock market that we don't need for the next five years. For example, my company retirement account were 100% invested in our company stock, which was OK since the funds weren't need for many years. Now that I control the account, I am reallocating this portion to a diversified stock portfolio.

    Fortunately, the company stock has done well returning about 15% annually on funds invested in the 1980s and is only down 17% this year. However, it has also had significant down years, dropping over 50% in 2000.

Due to the 2008 decline in our stock investments, we have implemented a new strategy of reducing our withdrawal rate. Our approach is to take one some flexible part time work, which provides about 10% of our income needs.

For more on Strategies and Plans Ideas, check back every Monday for a new segment.

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

Copyright © 2008 Achievement Catalyst, LLC

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