Determining and managing to the right investment allocation is critical to help be on track for a successful retirement. It is one of the primary ways to “know that you are OK” as you approach or are in retirement. The task of setting the right allocation and managing to that can be considerably more difficult for today’s executive. This is due to the increased complexity business executives often face.
A helpful way for business executives to dial in an allocation and construct a portfolio that takes into account this increased complexity is something called the “Lifeboat Drill.”
As you approach retirement, the Lifeboat Drill attempts to quantify both the magnitude and timing of withdrawals from your investment accounts so that you have dollars set aside for short-term withdrawal needs and long-term growth. Meeting these needs — short-term withdrawals and long-term growth — requires three distinct “buckets.”
Bucket #1: Purpose – preservation
The first bucket holds portfolio dollars needed in the next two years. These dollars should be held in investment vehicles intended to preserve principal value and, hopefully, keep pace with inflation. An investment well suited for this bucket is short-term, high-quality bonds that provide some return but little risk of loss.
Bucket #2: Purpose – moderate growth, diversifier to stocks
The next bucket holds portfolio dollars needed in years three through eight. These dollars should be invested in bonds with longer maturity and broader credit quality. Intermediate-term bonds have historically done a better job of offsetting negative returns in the stock markets, dampening the overall volatility of your portfolio and capturing more return than Bucket #1.
Bucket #3: Purpose – growth
The last bucket is filled with your remaining portfolio dollars. These are dollars you won’t need until eight to nine years from now. From a historical perspective, many market downturns have not lasted beyond eight years so this gives you strong odds of not being forced to sell anything in the portfolio at a loss. Stocks and alternative investments are appropriate for this bucket, because they have the best chance of growing.
Walking through the Lifeboat Drill can lead to a deeper understanding of the variety of investment options and the importance of holding different “buckets” in a portfolio. This can lead to confidence and patience with the portfolio, something crucial for investing success.
As an executive, building your lifeboat often means combining and maximizing the tax benefits of multiple savings and compensation vehicles to form an overall allocation strategy. As an example, your deferred compensation plan may be required to distribute during your early retirement years, possibly providing most of your cash-flow needs during that time. In that case, it might make sense to invest those dollars in assets described in buckets one and two above. In conjunction with a good advisor, the Lifeboat Drill can help you construct an investment strategy that simplifies the complex and helps lead to confidence. Knowing you will be OK can give you the freedom to pursue your goals and dreams now and in retirement.
All investment strategies have the potential for profit or loss. Fixed income securities are subject to increased loss of principal during periods of rising interest rates. They are subject to other risks such as changes in creditworthiness, market fluctuations, liquidity concerns, prepayments, early redemption, negative corporate events, and tax law changes.
Alternative investments are speculative and involve a high degree of risk. Investors could lose all or a substantial amount of their investment.
| Marcus Iwig, CFP, CPA, MAcc