Provide Inflation Adjusted Income for Life
Retirement Income Harvesting Strategy
Emotionally the market crash was really scary.
As retirees watched their account balances plummet, many were advised to reduce their withdrawals or go back to work to preserve their nest eggs. This retiree decided that he would rest easier if he mentally separated his investments into two groups: cash and bonds that could sustain him through his initial years of retirement, and stock funds that he would leave untouched until they could recover and grow. Without realizing it, this retiree had stumbled on an alternative income model. It struck us to be similar to another story many of us learn as children about a slave who becomes the ruler of Egypt by saving up from the years of plenty for seven lean years predicted to follow. In comparison to the old “let it grow and take out 4% strategy”, this alternative model allows investors to be more emotionally detached and helps to protect portfolios from periods of dramatic decline.
The “Retirement Income Harvesting Strategy” is derived from our agrarian past.
It fits in with how a tree farmer may grow his orchard including the harvesting and storage of his fruit crop. Storage of the crop is needed for the potential lean years ahead, fruit producing trees are needed for providing a crop in the present, and younger growing saplings are needed to provide the fruit in the future as the mature trees die out. If it weren’t for inflation, cash and bonds would be all you need in a portfolio. But even with modest inflation of 3% a year, your buying power would be cut in half in about 25 years, so you need to invest for future growth too. However, when you add stocks to your portfolio you also add risk.
The other issue to be concerned about is when the trees are no longer just mature trees. At some point these trees, like some investments, become less fruitful. They stop producing fruit altogether or just do not keep up with the increasing demand (inflation). For this reason we need to be able to replenish our less productive trees with more productive trees over time. We do this by planting younger growing trees which will mature and may become our strongest producers of the future.
With the planting of younger trees in the orchard, the next generation is provided with trees that are going to produce fruit for them in the future. This growth phase in the strategy may also provide a legacy for the next generation. In retirement, many people are more concerned about reliability of income than about return on investment. It is exceedingly difficult to provide both at the same time. But you can achieve both goals if you compartmentalize your money based on short-term, medium-term, and long-term needs.
The “Retirement Income Harvesting Strategy” is designed to help minimize the impact of emotion, reduce risk, overcome the impact of market volatility, and provide inflation adjusted income for life.