Here we go again with one of the most overused retirement planning metaphors---the nest egg---that bundle of money set aside for the future.  But this particular metaphor implies something important that is often missed.  Retirement planning includes more than just sitting on and growing invested capital.  The ultimate purpose of the nest egg is to be hatched!

It is not surprising that most current discussion is focused on the accumulation phase of retirement planning.  This is the first step, and many of us are still trying to stash away enough capital just to call it a nest egg!  The trend toward individuals having to assume responsibility for a significant portion of their retirement income is relatively new, and we are still in the early stages of this experiment.

But for the sake of those who are already retired or getting close, and to provide some insight into the full scope of our retirement planning responsibilities, let’s take a moment to discuss the hatching phase.  It turns our that sitting on the nest egg is the easy part.  The real work comes when we need to use it to provide steady and dependable investment income.  There are many new challenges associated with investing for income and growth rather than just growth alone.  Saving and spending are two completely opposite actions.  So it stands to reason that when we stop doing one, and start doing the other, some of the rules change.

Everyone has heard that when you invest in stocks you want to buy low and sell high.  But what is not so well known is that buying low is much easier than selling high.  When buying stocks there is a nifty little mathematical phenomenon that helps us out called dollar-cost averaging.  It is so natural that many people do it without even knowing it.  All you have to do is purchase a consistent dollar amount of stocks on a regular basis.  So for example, if a stock is selling at $50 one month and you buy 4 shares, but then it drops to $40 the next month and you buy 5 shares, you wisely purchased more shares at the lower price.  In reality you maybe didn't do this on purpose.  You just decided to invest $200 each month---perhaps through a payroll deduction.  Over time this approach allows you to automatically purchase more shares at lower prices than at higher prices.  It’s like stocking up on groceries when they’re on sale.

Now consider this important twist...if the dollar-cost averager automatically wins in the market, does someone else automatically loose?  The answer is yes.  And if you have any doubt, just ask the person selling shares to the dollar-cost averager!  Each time the dollar-cost averager buys a lot of shares at a low price, someone else has to sell a lot of shares at a low price---an obviously less favorable situation.  So why would anyone do this?  Well, perhaps the person selling shares is retired and needs income.

Here lies the major peril of investing during retirement.  The bumpy unpredictable stock market actually helps the person saving for retirement, but is in direct conflict with providing steady and dependable income during retirement.  When accumulating capital an investor can look at a down market as a time of opportunity---a time to buy low.  But during retirement the rules change.  The mathematics that worked so well before retirement take a nasty turn against you.  This is because more shares have to be sold whenever stock prices are low in order to maintain the same level of income.  It would be great if during retirement there was a natural tendency to sell high in the same way that there is a natural tendency to buy low before retirement.  But unfortunately this is not the case.  

An extended down market during the early years of retirement can be especially devastating if one is forced to sell a significant portion of stocks at low prices to meet income needs.  Therefore it is risky to have everything tied up in stocks during retirement, even though it can be tempting after a string of good years, and even if this strategy worked well prior to retirement.  Still, stocks usually do outperform other types of investments over the long-term.  So most retirees will need to invest in some stocks to keep up with inflation and to ensure that capital is not depleted too soon.

The question then becomes...how much of one’s portfolio should be in stocks vs. something more certain like fixed-rate investments?  This question is usually followed by a rule-of-thumb that says something like, "take 125 minus your age and invest this percentage of capital in stocks".  But how much peace-of-mind does this really provide?  Is the magic number really 125?  Isn’t there a better way to think this through?

Yes!  When you decide how much to invest in fixed-rate investments, what you are really deciding is how long you could wait if necessary before selling stocks.  In effect you are giving yourself some time and breathing room in case you encounter a down stock market.  This way you can still meet your income needs from the fixed-rate investments without having to sell your stocks at bargain-basement prices.  The more you have invested in quality fixed-rate investments, the longer you will be able to wait if necessary before selling stocks.

Therefore why not plan for specific maximum stock holding periods during retirement?  The key to this is to purchase fixed-rate investments with staggered maturities so that as they mature, the principal and interest exactly meets your desired income needs for the duration of the stock holding periods.  This sounds more complicated than it is.  The gist is that you divide your portfolio into two pieces.  One piece is used to purchased fixed-rate investments that provide regular income---much like the paycheck you probably received while working.  The other piece is used to invest in stocks for the future---just like you probably also did while working.

If your stocks do well, great!  Then you may want to consider selling some shares to purchase additional fixed-rate investments, i.e. sell high.  But if your stocks get off to a rough start, at least your immediate income will be secure and hopefully the market will improve before the end of your stock holding periods.  Eventually stocks will have to be sold to purchase additional fixed-rate investments for income.  But the key is to give yourself some time, so that you can sell when you want to---not when you have to.

This approach offers many advantages.  Your income will be guaranteed for a predetermined number of years before having to sell stocks.  You will be able to continue to participate in the stock market as a long-term investor, which along with diversification are the keys to reducing stock market risk.  You will be in complete control of your plan rather than letting the markets be in control of you.  And most important you will have the peace-of-mind to fully enjoy your retirement years.  

Retirement planning includes much more than just investing capital for growth.  The ultimate goal is steady, dependable, and lasting income.  This is a challenge filled with many uncertainties.  But with thoughtful plans that include deliberate maximum stock holding periods, we can all balance the competing needs of guaranteed income and long-term growth during retirement.  So next time you hear the nest egg metaphor, remember, someday that bird is going to hatch...and hopefully fly!