In this short post, we will once again repeat what we believe to be essential retirement planning guidance from our late friend, Dirk Cotton. In two of his early 2019 Retirement Café blogposts, Dirk said,
“The most important decision you will make in retirement planning is how much of your resources to allocate to the upside and floor portfolios” and “The correct balance [between the upside and floor portfolios] will depend on how willing you are to risk losing your standard of living for the chance of having an even higher one.”
This guidance from Dirk forms the basis for the Actuarial Financial Planner (AFP), where we encourage you to allocate sufficient non-risky resources to fund the floor portfolio used to cover your expected future essential expenses.
We were reminded of Dirk’s guidance when we recently read the Advisor Perspectives article, “The Bursting of the Stock Market Superbubble” by Ron Surz. Mr. Surz concludes his article by saying,
“As is usual in bear markets, Wall Stret [sic] advises “buy the dip” and “stay the course.” That will work if Grantham and others are wrong and this is not the bursting of a superbubble. But 78 million baby boomers cannot afford to risk their lifetime savings at this time because most are in the “Risk Zone” during which losses can irreparably spoil the rest of their lives. We each get only get one passage through the Risk Zone, and this zone is currently extremely risky. Baby boomers need to move to safety, which means Treasury bills and intermediate-term TIPS.”
We agree with Mr. Surz that many of us baby boomers are in the Risk Zone and this zone can be extremely risky. Rather than blindly rebalancing our investment portfolios or buying stocks at the dips, each of us needs to find the correct balance between:
- growing our assets,
- protecting our assets, and
- spending our assets prudently
We believe that the AFP is a relatively simple, but robust, tool that can be used to help you find this balance. In addition, it can help you feel more comfortable about the level of risk you are taking in this current risky economic environment.
