If you are familiar with Henssler’s Ten Year Rule, you know at 10 years from retirement, we recommend you begin putting money in fixed-income investments to provide for your liquidity needs once you retire. However, we also know that today can be a scary environment. We don’t know what lasting effects the coronavirus pandemic will have on the long-term economy. We also have a low interest rate environment, and a ballooning national debt that could lead to inflation.
The reason we recommend investors plan for their liquidity needs is so they are not forced to sell investments in a down market. With 10 years of liquidity, investors shouldn’t have to worry about what the market is doing today or even this year. They are able to wait for a down market to recover before they need to sell equity investments because they have money set aside for living expenses.
If you are at that threshold of 10 years until retirement, you still may be apprehensive locking money up for 10 years in fixed-income investments, especially in a low-interest rate environment. It is hard to find any type of investment that is paying interest that is both safe and stable. You do not want junk bonds that are at high risk of default. We prefer seeing clients in U.S. Treasury bonds or high-quality municipal bonds. You may have to accept the inflation risk. We recommend keeping bond durations short, so you have the opportunity to reinvest at higher interest rates.
If inflation is one of your main concerns, keep in mind that higher interest rates are something the Federal Reserve uses to combat inflation. In your equity portfolio, you may opt to buy stocks in Utilities, Consumer Staples, or the Healthcare sectors as these sectors can pass along inflation to the consumer easier than other sectors. You may be able to enjoy price appreciation along with the dividends; therefore, you may be able to benefit from rising inflation today.
If volatility is your concern, you may also choose to direct your savings into fixed-income investments so that you’re not selling your equities today. Within your equity portfolio, you may want to consider a diversified portfolio of dividend-paying stocks, where instead of reinvesting dividends, you use the cash to buy fixed-income. It could be a good move right now to rebalance your portfolio, shifting the excess in overweight sectors into your fixed-income allocation.
At 10 years from retirement, you are also likely in the highest earning years of your career; however, if you are concerned about the economy and the security of your job, you may want to accelerate shifting money into your fixed-income investments. Let’s say you work in the travel industry. The pandemic has definitely changed the outlook for that industry, but we don’t know for how long. You may consider selling equity investments today to take some of that money off the table. You would then take your current savings and add that to your fixed income allocation so in six or seven years you could have your 10 years of liquidity built up so that you could retire without worry.
It is very easy to get bogged down by what is going on in the market today. Remember to stay focused on the long-term goal. If you have questions on how to begin shifting your asset allocation for retirement, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
