New Rules for the Older Investor
June 21, 2009 by MJP
Filed under Investing for Retirement
I read an interesting article this week suggesting that for the older investor (e.g., baby boomer and retirees), the old investing rules may no longer apply. Those investing rules of thumb we have heard for so many years may have become the rules of “dumb.”
What really interested me in this article were the recommendations of the financial planners who talked about what I call the “retirement emergency fund.” This is a fund that you set aside in safe, secure, and easy to access investments. You use this fund to avoid having to sell other investments (e.g., stocks and stock mutual funds) during a down market.
I had thought that a three year emergency fund would be adequate. That’s not what I read in this article. Instead, some planners are saying that you should have 8-15 years of expenses (food, housing, utilities and insurance) in cash or cash equivalents, such as bonds. One planner suggests building a ten year ladder of bonds, with a different group coming due every six months. These can be Treasuries, municipal bonds, corporate bonds, and even CDs. Another advisor recommended a 15 year ladder of zero-coupon bonds. Your tax situation can affect which of these options is best for you. Although I-Bonds are no bargain now, they do have the benefit of being tax deferred.
Of course, if you expect to have monthly income from a pension, fixed annuity, or Social Security, you can offset the annual requirements of your emergency fund by that amount.
I am definitely going to spend more time investigating extending our retirement emergency fund. I’m also going to read this new article examining whether equities are really more volatile over the long haul than we have been led to believe.
What about you – are you changing your investing rules?
Also, don’t forget to read this week’s Carnival of Personal Finance.
Photo credit: Showmeone
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8-15 years of expenses? In cash? Where inflation can ravage it? Allow me to highlight a different approach, one suggested by financial planner and author Ray Lucia in the book “Buckets of Money.” The first seven years of your retirement funds in “safe” money, i.e. CDs, money market funds, SPIAs, short-term bond fund. The next seven years in intermediate risk money i.e. Total Bond Index, GNMAs, TIPS, maybe a bond-heavy balanced fund where there is slightly more risk for a bit more interest. The rest of your money is in stocks, U.S. and international, small and large, plus a dash of REITs. That money grows for 15 years before you need it. I’m not Ray Lucia nor do I work for his firm. But it seems to me to be a very common-sense plan which will keep one able to sleep at night through bear markets and still take advantage of future growth opportunities.