Wouldn’t it be nice . . .?

Forty years ago, we were singing along with the Beach Boys, “Wouldn’t it be nice if we were older?” As the difficulty of these very basic retirement questions indicates, “being older” brings some challenges, too. But, every retiree – current or soon-to-be – needs to answer these questions. Here are my answers:

How much do I need in liquid reserves in retirement? I feel I need at least six months of subsistence spending readily available in share draft accounts, savings accounts, and very short-term, fixed income investments. I’d also like to have another six months or more in semi-liquid assets – intermediate-term, high quality bond funds, term CDs, etc. The rest of my retirement nest egg can be in a diversified portfolio of long-term investments. (I’ll also do some things to help assure that this level of reserves is enough. We can talk about that later.)

How do I know when stock or bond prices are “depressed” (and I should wait for a recovery before selling)? For me, this question has a two-part answer. First, I hope to never have to make this decision. Ideally, I will be able to gradually liquidate our long-term investments in hundreds of small increments through a life-long systematic withdrawal/liquidation program. This will steadily “drip” dollars into my liquid reserves, from which we will pay our living costs. This gradual liquidation program will make timing virtually a non-issue. It will capture essentially the asset allocation’s balance-weighted average return over the life of the portfolio.

But, no mater how hard I try, I suspect that occasionally the drips won’t keep up and I will have to come up with what constitutes a veritable bucket of cash – for another year of college for one or more of my progeny, a once-in-a-lifetime trip with my soul mate, whatever. Hopefully, I’ll be able to fund these out of my second-tier reserves, and then take some time replenishing them with a period of doubling up the systematic drips. But, when that isn’t enough, here’s what I plan to do.

1. I will consider selling some of whichever asset class has done the best over the last few years relative to its long-term average return. Currently, that might include funds focused on mid-cap value stocks or the lowest quality junk bonds.

2. If I am feeling particularly depressed about the investment markets – if the economic environment is tenuous and most market prognosticators are bearish – I will do everything I can to not sell anything, particularly not anything that has declined to valuation levels that are well below their historical average. Instead, I will consider borrowing from my friendly credit union. Or, maybe just deferring the expenditure, thereby deferring the need to liquidate long-term investments.

So, as this indicates, the factor I will use to indicate when the investment markets are depressed . . . is my own current state of “economic depression.” If I and most of my fellow investors are afraid of the markets, chances are the markets are beaten down by the selling of more skittish investors. Likewise, if everything looks rosy, the more speculative investors have probably been throwing money into the market, making it a good time to raise some extra cash.

Tough to do? Definitely! The first alternative – gradually liquidating investments over a number of years – is unquestionably the easier and safer approach for any normally emotional human being. But, if you find yourself in need of extra cash and are able to act exactly contrary to your current state of mind, you are likely to do better than if you just go with the feeling of the moment.

That might have worked in the 60s and 70s. We were young and stupid then. But, this is now. We’re just (emotionally) stupid . . . and running out of time.