Keeping your retirement money safe

The following excerpts are from Kelly Greene, How to Bulletproof Your Nest Egg, Wall St. J., June 14, 2008, at R1:

Increasingly, financial planners and researchers are warning clients that the timing of retirement — in other words, the luck of the draw — will largely determine how a nest egg will fare in the future. If you’re fortunate enough to retire at the beginning of a strong bull market, such as the early 1990s, your savings might easily last for three decades. If you’re unlucky enough to retire at the start of a bear market or recession — say, early 2000 or late 2007 — you could find yourself struggling financially for years to come. * * *

Harold Evensky and Deena Katz, who run their own advisory firm in Coral Gables, Fla., are authors of several books about investing and are among the most prominent figures in the financial-planning industry. The couple (they’re married) have used their “cash-flow-reserve strategy” to create regular paychecks for retirees since the 1980s, and they’ve successfully weathered difficult markets in 1987 and 2000-2002. * * *

[They] provide clients with three accounts. The first is a simple checking account. The second is a “cash-flow reserve portfolio” with approximately two years of spending money. Half of that money (or one year of spending) is placed in money-market funds; the other half is invested in a low-cost bond fund, with high-quality short-term (meaning one-year duration) municipal bonds. Once a month, the client transfers a “paycheck” from the reserve account to his or her checking account.

The rest of the nest egg goes into the third account: a long-term investment portfolio. Here, about 70% of the money is invested in stocks and 30% in bonds — typically divided among those with one- to three-year maturities, three to five years, and five to 10 years. When it’s possible to sell stocks without significant losses, a client moves money from the investment portfolio into the cash-flow reserve to bring the balance back up to two years of spending power.

What happens if there’s more than a year with significant losses in stocks? At that point, Mr. Evensky explains, the client turns to the bonds in the investment portfolio, which function as “second-tier emergency reserves.” No matter how bad the markets get, bond investments are unlikely to have significant losses; thus, you could refill the cash-flow reserve by liquidating some bonds, and buy time to defer the sale of stocks in a bear market.