Allocating Funds For 10-Year Liquidity In An Uncertain Environment

By William G. Lako, Jr.

If you are familiar with the Ten Year Rule, you know at 10 years from retirement, I recommend investors begin putting money in fixed-income investments to provide for liquidity needs once they retire. However, I also know that today can be a scary environment. We don't know what lasting effects the coronavirus pandemic will have on the long-term economy. We also have a low interest rate environment and a ballooning national debt that could lead to inflation.

The reason I recommend investors plan for their liquidity needs is so they are not forced to sell investments in a down market. With 10 years of liquidity, investors shouldn't have to worry about what the market is doing today or even this year. They are able to wait for a down market to recover before they need to sell equity investments because they have money set aside for living expenses.

If you are at that threshold of 10 years until retirement, you still may be apprehensive about locking money up for 10 years in fixed-income investments, especially in a low-interest rate environment. It is hard to find any type of investment that is paying interest that is both safe and stable. You do not want junk bonds that are at high risk of default. I prefer seeing investors in U.S. Treasury bonds or high-quality municipal bonds. You may have to accept the inflation risk. I recommend keeping bond durations short so that you have the opportunity to reinvest at higher interest rates.

If inflation is your main concern, keep in mind that higher interest rates are something the Federal Reserve uses to combat inflation. In your equity portfolio, you may opt to buy stocks in Utilities, Consumer Staples, or the Healthcare sectors, as these sectors can

pass along inflation to the consumer easier than other sectors. You may be able to enjoy price appreciation along with the dividends; therefore, benefitting from rising inflation today.

If volatility is your concern, you may also choose to direct your savings into fixed-income investments so that you're not selling your equities today. Within your equity portfolio, you may want to consider a diversified portfolio of dividend-paying stocks, where instead of reinvesting dividends, you use the cash to buy fixed-income. It could be a good move right now to rebalance your portfolio, shifting the excess in overweight sectors into your fixed-income allocation.

At 10 years from retirement, you are likely in the highest earning years of your career; however, if you are concerned about the economy and the security of your job, you may want to accelerate shifting money into your fixed-income investments. Let's say you work in the travel industry. The pandemic has definitely changed the outlook for that industry, but we don't know for how long. You may consider selling equity investments today to take some of that money off the table. You would then take your current savings and add that to your fixed-income allocation so, in six or seven years, you could have your 10 years of liquidity built up so that you could retire without worry.

It is very easy to get bogged down by what is going on in the market today. Remember to stay focused on the long-term goal.

William G. Lako, Jr., CFP®, is an Executive in Residence at Kennesaw State University's Coles College of Business and a principal at Henssler Financial and a co-host on Atlanta's longest running, most respected financial talk radio show "Money Talks" airing Saturdays at 10 a.m. on AM 920 The Answer. Lako is a Certified Financial Planner™ professional.