I love the game of chess. For more than a millennium, the game has challenged and inspired those who study it. Chess requires not only evaluation and calculation but also visualization and creativity. Of the three phases of the game, I believe the opening is the most impactful, and this is the phase where you establish your position.
Retirement planning is a lot like the game of chess. Both require planning for the long-term while navigating short-term threats. Both depend on a good strategy, ingenuity, and ongoing analysis. And if you end up with a bad position in either chess or retirement, you will discover that you have no good options.
I often hear people say, “I’m close to retirement and want to protect my investments. I should therefore change my allocation to conservative.” This decision may create more problems than it prevents. It is not unlike a chess player saying, “We have entered the endgame, and I am winning. I will therefore take my queen off the board to protect her.”
What needs to be understood about stocks, or market risk, is that it is your most powerful piece. If used properly, that piece can provide significant protection. If that piece is removed from the board, minor threats can become major. On the other hand, too much exposure to market risk can result in short-term threats pressuring checkmate, and retirement is a game you can’t afford to lose.
The two main threats to a retiree’s portfolio are inflation risk and market risk. Interestingly, conservative investments decrease market risk, and market risk decreases inflation risk. In other words, to reduce your total risk exposure, you must maintain a properly balanced portfolio. Removing one risk entirely only increases the other, which can lead to disaster.
So how does a retiree properly position their portfolio? The strategy that we believe is superior to all others is called Income for Life. It exposes assets to market risk based on the time horizon. Short-term assets that will be used within a five-year period have little to no stock market risk. This portion of your portfolio offers protection from downturns in the stock market but does not protect against inflation.
Money that is not needed for more than five years can tolerate more volatility. We introduce these assets to slightly more market risk, which reduces inflation risk. Money that is not needed for more than ten years can safely withstand greater market risk still. This portion of your portfolio has a higher growth objective, further reducing inflation risk.
By dividing your portfolio into segments based on time horizon and then investing those segments to achieve different goals, we can help keep you in a great position throughout retirement. We believe this is the best way to significantly reduce both overall risk and your chances of being checkmated.
For a more in-depth conversation about Income for Life, click here for an episode of the Power Up Wealth podcast titled “Episode 26: Positional Advantage.”
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