The concept and comparison of savings vs. investments is important to understand, especially for people planning their retirement. It isn’t discussed nearly as often as I believe it should be. In my opinion, this should be one of the initial conversations financial advisors have with people heading into retirement (or anyone for that matter). I talk more about this in the link above, so I’m not going to go into too great of detail here
I just wanted to quickly mention it because it ties in directly with what I’m about to share with you today—the actual planning part. This step involves the creation of what I call your “floor and upside.
Successful implementation of this concept plays a key role in building a foolproof cash flow plan.
It’s the part where we very strategically allocate your hard-earned money in places that will allow every one of your retirement goals to be met.
You’ve probably read and/or been told to avoid investing in the stock market in retirement. While your priorities do need to shift as you plan for retirement, avoiding the stock market altogether does not necessarily need to be part of that shift unless you want it to be. There is just a slightly different way you should approach the stock market in retirement.
The first step is locking in complete protection of a portion of your income…
This is called building your floor.
The portion of income that you allocate to your floor should be adequate enough to, at the very least, cover your basic living expenses for the rest of your life no matter what. You need to build a solid floor before anything else.
Think of your floor as a permanent and indestructible life jacket for your income. It protects it from drowning in a down market.
Your floor is designed to replace the cash flow that you will stop receiving once you retire from your job. Successfully building your floor makes it less risky to invest in the stock market during retirement.
This is when building your upside comes into play.
After allocating enough money in a safe place that will provide you protected and guaranteed lifetime cash flow, you can then safely invest a portion of your money into more risky vehicles without facing the threat of losing everything in retirement.
Allocating money to your upside isn’t designed to provide a consistent and guaranteed monthly income stream. It’s designed to allow your money the opportunity for uncapped growth with good market performance.
Creating a healthy balance between your floor and upside is a critical factor in creating a cash flow plan that will make it worth every hour you’ve ever spent working.
It’s never 100% safe to invest in the stock market, and it’s even less safe to do so in retirement. This isn’t news to anyone. However, correct implementation of the “floor and upside” cash flow strategy renders it just as safe for retirees to invest in the stock market as it does for someone still working.
Losing money in a down market while you’re still employed is very different than losing money in retirement. You receive a reliable income while employed. Once you retire, that reliable income stops.
That’s why it’s crucial to build your floor before your upside. It makes the transition into retirement not only an easy one, but one that also allows you to safely invest into riskier places.
Building a solid floor in retirement allows you to participate in market upside while avoiding looming threats, such as running out of money.
The success of this method relies on how it is designed and implemented. You want to make sure your cash flow plan provides strategic allocation of your money so that you receive the highest possible guaranteed income that you can get and guidance towards smart investment choices to supplement that guaranteed income.
You need to discover the best source of cash flow for your specific wants and needs, and follow a customized plan to successfully and efficiently build your floor and upside. That is how you get the best of both worlds in retirement.