Is Your Retirement Investment Strategy Setting You Up for Disaster? | The Limitless Retirement Podcast

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Have you ever wondered if your carefully planned retirement could be at risk because of an outdated investment approach? You’re not alone. Many retirees are using strategies that were decades ago, but could put their entire retirement in jeopardy. I’ve spent the last 15 years working as a financial advisor and helping hundreds of clients navigate this exact challenge. Today, I’m going to share with you

what I’ve learned about investing wisely for retirement, especially during these unprecedented economic times. We’ll cover three critical areas on how to invest strategically when uncertainty fills the markets, specific actions to take when the market turns rocky, and how to properly stress test your portfolio.

to ensure that your money lasts throughout your 30-year retirement journey. Think about investing for retirement like flying a plane. Now, I’ve never flown a plane myself, but having been a passenger of enough flights, I have enough experience to understand the critical difference between cruising at an altitude and coming in for a landing. This distinction perfectly illustrates the shift

that you need to make in your investment strategy as you approach retirement. When you’re still working and building your portfolio, you’re in cruising mode. Market downturns simply are just turbulence along the way. Sure, they’re uncomfortable. Nobody enjoys watching their portfolio drop, but you have time to recover before the landing. The turbulence, while unpleasant, isn’t a deal breaker.

for your overall financial journey. However, as you approach retirement, everything changes. You’re now entering the landing phase of your overall retirement flight. This requires an entirely different approach because the stakes become dramatically higher. A mistake during landing can crash your retirement dream. A mistake during landing can crash your retirement dreams.

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Yet I’ve regularly met with folks in their 60s who are still investing as if they were 30 years old. They’re still in cruising mode when they should be preparing for a smooth landing. I’ll show you exactly how to prepare your portfolio for that crucial landing phase even in these unpredictable market times. But first, let’s examine the two most dangerous misconceptions that could derail your retirement

if not addressed early enough. The first major mistake I see is the belief that markets always recover quickly. Let me be clear, while markets have historically recovered and grown over time, there are numerous cases where the markets didn’t recover any quick amount of time. Maybe in two, three, or even five. Let’s take a look at two eye-opening examples from the last 30 or 40 years.

Do you remember the oil crisis bear market that began in January of 1973? Well, if not, it took almost eight years for the market to return to its pre-crash levels. Even more dramatic was the NASDAQ crash that started in March of 2000. The tech bubble burst and the market didn’t fully recover until 2017. That’s a staggering 17-year wait.

I recently met with a client, let’s call him Robert, who retired in early 2000 with a tech heavy portfolio. Like many investors at that time, he was captivated by the tech boom. Something that might sound familiar given today’s market trends where technology stocks have become a large portion of clients’ portfolios. When his portfolio was cut nearly in half and he was simultaneously withdrawing income,

From that portfolio, the consequences were devastating. Robert would either be forced to run out of money entirely or dramatically scale back his retirement lifestyle he had worked decades to achieve. This scenario illustrates what financial professionals call sequence of returns risk. That is the danger of retiring just before or during a significant market downturn.

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And here’s what the uncomfortable truth is. You can’t avoid this risk by trying to time the market unless you can somehow predict the future. And we know that’s not possible. If your retirement age coincides with a market decline, you will feel the impact unless your investments are positioned appropriately for this landing phase. That’s why

If you’re within five years of retirement, you absolutely must assess the current risk level of your portfolio. Whether you speak with me or another financial advisor, please seek qualified advice on this critical aspect of your investment plan. The second misconception that can wreck your retirement is cash hoarding. I’ve been seeing this trend a lot recently. People are starting to stockpile cash.

thinking it’s the safest approach during uncertain times. While current money market rates aren’t terrible, they’ve been declining over the last six to 12 months. And more importantly, this isn’t a viable long-term strategy. And let me explain why. Think about inflation for the moment. Does it make headlines every day? Well, not always, but recently it has. That’s why I call inflation a silent killer of retirement plans.

During most periods of time when inflation seems under control, it’s constantly eroding your purchasing power. And the only effective defense we have is growing your money fast enough to offset those inflation impacts. I remember meeting with a couple last year who had over $800,000 certificates of deposit. They were proud of their safe investment approach.

But I had to share some uncomfortable math with them. Over the past couple of decades, the real rate of return on CDs, that’s the stated interest rate minus taxes on the interest. And then you have to also subtract out inflation has frequently been negative. I explained that they had found what I call a very safe way to lose money slowly.

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While their account balances weren’t decreasing on paper, the actual purchasing power of the money they had was steadily being eroded year after year. And trust me, I can understand the impulse to want to build cash reserves as retirement approaches. It feels like protection against market volatility, but this approach creates a different kind of risk. The risk

that your money won’t last throughout your whole retirement years. Let me show you this in reality and what it looks like in action. According to the data compiled by Hartford funds from Bloomberg, over the past 20 years, the real rate of return on CDs has been negative 16 of the last 20 years after accounting for taxes and inflations. That means you’ve actually lost about 80 %

of your purchasing power over that time. I’m not saying you should never invest in CDs, but clearly this shows how excessive cash hoarding can be just as harmful as being overexposed to market risk. So what’s the solution? How do you properly prepare for the landing phase of your retirement journey? While there’s no one fits all answer, most retirees benefit from what I call a three bucket portfolio strategy.

Let me walk you through what this looks like and how it works. First, I want to emphasize that what I’m about to outline is a framework. The plans we create for our clients are always individualized to their accounts for their specific risk tolerance, existing income sources, personal goals, and how long their retirement time horizon is supposed to last. But this approach provides a solid foundation for most retirement.

portfolios. We’re going to start with bucket one. Bucket one is your cash reserves. This is money you need readily accessible for both immediate income needs and emergencies. This typically includes money market accounts, savings accounts, checking accounts, and some CDs. We generally recommend keeping between one and two years of spending needs in this bucket number one. In addition to that, we also recommend

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that you keep an emergency fund in your personal savings and checking. Let’s go through an example. If you needed $3,000 of monthly income from your investment portfolio, you would want to maintain at a minimum of $25,000 in your emergency fund. And you would want to have between $32,000 and $64,000 in this first bucket of money, depending on what your personal risk tolerance is.

and other factors that might affect your financial plan. The next bucket we have to think about is bucket number two. And this contains your medium term money. This is primarily composed of income producing assets. The income generated here helps replenish bucket one as you spend it down. These assets are here to serve as a critical buffer during any extended bear market.

For this bucket, we typically recommend having anywhere from four to six years of income needs invested in assets like bonds and ladders and maybe some type of fixed annuities. In our ongoing example of $3,000 of monthly income needed from the portfolio, you would want to maintain at least $144,000 in this second.

What this means in practical terms is that between bucket number one and bucket number two, you’ve secured approximately five to seven years worth of income between interest earned and potential asset spend down before you would have to touch anything in the third bucket. This provides tremendous peace of mind when markets become volatile and you’re not

forced to make the number one mistake that retirees make, which is to sell stocks when the markets are down. This is a crucial factor and something that we talk with our clients about is having this war chest. This is that war chest of cash and bonds that will help you weather those storms. in bucket number three, this is where you hold your long-term growth money. This is primarily going to consist of stock market investments.

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This portion of your portfolio should be in well-diversified investments. While its specific composition may vary based upon your individual goals and circumstances, the key function of this bucket is to provide long-term growth that will replenish the first two buckets over time. Most importantly, we want to tap into these assets at a time of our own choosing.

not because we’re forced to sell during a down market. That’s precisely why we’ve structured the first two buckets as we did. When markets are performing well, we can strategically harvest some of the gains from bucket three and move that money down into the first two buckets, essentially locking in those gains for future income needs. This disciplined approach helps prevent emotional reactions

during times of market volatility. And we know it’s not if market volatility happens. Now that you understand the three bucket strategy, let’s talk about the next critical step everyone approaching retirement should take. That is stress testing your portfolio. Think of your investment portfolio like a house in an earthquake zone. You wouldn’t wait for an earthquake to hit your home to find out if your foundation will hold.

You’d want to test it beforehand. And that’s what proper stress testing does to your investments. You need to examine how your specific portfolio would perform through various market scenarios. What a significant market drop in your portfolio caused you to abandon your investment strategy altogether? Would this fear cause you to change course of action? Would it put your entire retirement at risk? And equally important,

How inflation resistant is your portfolio? Some assets don’t respond well to inflation at all. Do you have too much cash or too many low earning assets that won’t keep the pace of inflation? These are major concerns that you need to be aware of. And these are just two of the major retirement risk that we’ve discussed today, market risk and inflation risk. There are others we haven’t covered in depth.

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like longevity risk, which is living longer than your money lasts, early mortality risk, and healthcare costs in retirement. The point is though, that retiring well requires thorough planning across multiple dimensions. Let me share a quick story about why this matters. I’ve worked with a couple who thought they were completely prepared for retirement. They had a substantial portfolio, but when we ran

their plan through different stress test scenarios, we discovered that they were extremely vulnerable to a market downturn in their first five years of retirement. By adjusting their portfolio using this three bucket approach I’ve outlined today, we were able to create multiple layers of protection for their retirement income while still maintaining the long term growth that we need.

If you’re unsure whether your portfolio can withstand another 2008 style market crash, or if you might be unknowingly taking on too much risk as you reproach this landing phase of your retirement, I encourage you to seek professional guidance. My team and I offer a comprehensive stress test that is part of our free retirement assessment. Remember.

The time to prepare for retirement isn’t when you’re already there. It’s in the years leading up to it. Just as a pilot begins preparations for landing well before reaching the destination, you need to adjust your investment approach as retirement approaches. With the right strategy in place, you can navigate uncertain economic times with confidence, knowing your retirement income is protected.

If you’re ready to see how these principles apply to your specific situation, and if you’re interested in diving deeper into the three bucket strategy, I’ve created an in-depth video that explores each component in greater detail. In that video, I’ll walk through specific examples of what assets belong in each bucket and how to determine the right proportions for your situation.

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You can find that video right here and you’ll also find it linked in the description. It’s the perfect next step in mastering your retirement investment strategy.