Do you get the same feeling I get when somebody tells you, “This is going to be easy?”  I start to think back to the boxes at Christmas that read, “Some assembly required.”  Right!  I spent hours trying to put together LEGOs, train sets, race-car tracks, and tricycles.  Okay, I am not the most mechanically gifted Boomer out there.  I got it.  But, “easy”?  Really?

I am not sure Wall Street would like you to believe that investing and retirement planning are easy, yet when I listen to the media talking heads on finances, my mind reverts to “some assembly required.”   (After all, if it was easy, you wouldn’t need them, right?)

Wall Street’s Pyramids and Risk Tolerance
Wall Street’s typical model of investing starts with the “Pyramid of Assets” and moves on to “Asset Allocation” models, which seem anything but easy or simple to understand.  These models depend on the broker knowing your “risk tolerance,” which is the degree of uneasiness an investor is willing to experience when there is volatility in his/her portfolio.  In other words, if your portfolio is experiencing a downward movement and you tend to freak out quickly, you would have a lower risk tolerance.  If you feel okay when your portfolio is down, believing it will rise with the tide, you have a higher risk tolerance.  Again, a broker usually gives you a test to determine the degree of your risk aversion.

An Easy-to-Use Model of Retirement Planning
Let’s take a look an easy-to-use model of retirement planning and see how it helps the conservative investor easily understand how to allocate assets.  Maybe then, you will have the answers at your fingertips.

First, imagine all your investable assets are liquid, and we could arrange them in any way you like.  That includes all your CDs, money markets, annuities, stocks, bonds, mutual funds, REITs, or whatever.  It would be everything except your real estate, all liquid with no strings attached.  Next let’s make a plan starting today.

You will have to imagine your assets not where they are invested today, or last year, or even where they were 10 years ago.  We’re not looking in the rearview mirror, but trying to map out your future.  This is vitally important, because you want to have your investments set up for your needs going forward, not left in accounts that might jeopardize your future.  Of course, I realize not all of your assets are actually liquid and in a position to move to your ideal situation.  Yet, this exercise will give you a glimpse of what you value—the types of assets in which you might invest and how to allocate them.

Rule of 100
Let’s divide assets into three categories, which represent three types of assets.  The first category is your cash reserves.  The second category is the Green Money category and holds protected-growth assets.  The third category represents our Red risk-growth assets, which move up or down with the market.

You might not have a clue how much money you want in each category and need a little guidance.  It might be helpful to picture money as being either GREEN or RED; GREEN for Safe and RED for Risk. GREEN “Safe” money is money not exposed to risk in the market.  RED “Risk” money is just that, money in the market.

It also might help to picture my friend “Steve, the Sleepless Investor.”  He’s a 65-year-old retired salesman with $600,000 of investable assets.  Steve’s advisor suggests an often-used formula called the “Rule of 100” to help him determine how much he wants in each of the three categories.  Very simply, he used the formula of 100 minus his age, to determine how much money he wants in Green protected accounts and Red risk accounts.  So, subtracting 65 from 100 equals 35.  Steve decides to put 65% in the first two categories.  Mr. Sleepless first determines he wants 10 % or $60,000 in the first category for an emergency fund, plus he’s planning a “restful” vacation in Seattle.  Next, he puts the balance of the Green money portion from the Rule of 100, which is 55% or $330,000 in a laddered portfolio of indexed annuities in the second category.  Steve has 35% or $210,000 left to be placed in the third category’s Red Risk assets.  He chooses a professional money manager who manages a conservative portfolio of funds.

Steve is finally able to find peace with his assets.  Now he’s on vacation, asleep in Seattle.

This easy-to-understand model of retirement planning simply asks you to determine your liquidity needs, and then how much you want at risk.  Protection and simplicity are keys.  Yes, there is an allotment for Red Risk money, and this model makes it easy to determine how much risk a conservative investor desires.  My final piece of advice is this: find a professional financial advisor and ask them to help you properly allocate your portfolio according to your desires.

While making a conservative plan for retirement will take some time and consideration, it can’t be as hard as the train set I put together on Christmas in 2000.  Can it?


The Retirement Pros
April 2013