Over the years, we’ve continuously recommended having 10 years of liquidity needs in fixed-income investments. During your working years, you’re actively saving for retirement while your liquidity needs are covered by your income. However, as you approach retirement, you have to begin moving your saved assets into fixed-income investments for the day you stop receiving income.
The Ten Year Rule is pretty simple: Money you need within the next 10 years should be in fixed-income investments to protect principal, while money not needed should remain in growth investments, such as the stock market. What often confuses people is that many were taught never to touch principal. In reality, life doesn’t always work that way. Unless you have a significant amount of money, it is very difficult to generate enough income off of your invested portfolio to not have to dip in to your principal. So, if you are going to have to touch your original investment, it is best to take from the portion that is protected from the daily ups and downs of the market. The Ten Year Rule is designed to provide solace, allowing you to sleep at night knowing that the money you need for the next 10 years will be available when you need it.
Ideally, 10 years prior to your target retirement date you begin looking 10 years out at what money you may need from your retirement funds. Your cash flow projections account for money you may receive from pensions, Social Security, portfolio income (dividends/interest), rents and royalties, or annuities. Any shortfall between what you have coming in and your living expenses should be covered by your fixed-income investments.
Assets in your IRA or brokerage accounts can be invested into CDs or Treasury bonds. However, if the majority of your money is in a 401(k), you are limited in your investment choices. You may have to move money into a money market fund or bond fund. Some company-sponsored retirement plans allow in-service withdrawals, which may allow you to transfer a portion of your assets to an IRA so that you are able to hold individual bonds or CDs. Each subsequent year, you look another 10 years out, so you are slowly transitioning your money to fixed investments that will mature when you need the cash.
If the market is down or interest rates have hit a new low, you have the ability to wait a few months to a couple of years before you pull your money out of the stock market. Above all, you want to avoid selling stocks in a down market. If you know you have 10 years’ of liquidity, you should be able to avoid reactionary moves like pulling your money out when the market is tanking.
This strategy works both in normal markets and markets that face a great deal of uncertainty like our current market. No one knows what may happen with the new presidential administration. Inevitably, whoever is president will try to affect change, whether it is taxing individuals, corporations or estates. The markets will react; that we know. However, if you have 10 years of liquidity, you have planned beyond four years of a presidential administration—even beyond eight years if re-elected. With a Ten Year Rule plan in place, you keep the emotion out of your financial decisions. Your plan is built, looking in totality of what your specific needs are.
If you have questions regarding your fixed-income assets and how they fit into your overall financial plan, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
Disclosures: This article 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.
