We're all familiar with the food supply chain of farm to store to kitchen. One strategy to manage finances in retirement works similarly to this metaphorical food chain:
- You cultivate your crops (your long-term investment portfolio).
- You maintain food stores (your intermediate accounts), which remove the risks of growing crops, and preserve your supplies as a ready source of future sustenance.
- And finally, you have food in your kitchen to eat (your spending accounts, which are stable and available to pay for expenses).
Your crops (your long-term retirement assets) are the source of your food. Good and bad years are normal, but if the crops fail consistently, so will the whole supply chain. Your long-term portfolio must be built for growth, which requires time to overcome the bad seasons. Numerous risks impact your growing crops. Plan for various risks and try to manage your farming to minimize the risks while still producing healthy amounts of food. When some crops fail, others must compensate so the supply of food to the store continues. Every year, you will harvest some crops to supply the store while the rest remain to grow future supplies.
After harvesting, supplies are stored for future consumption. This intermediate step no longer provides growth, but food must be preserved until it’s time to stock the kitchen. Expect to tap these food stocks every few years. Preserving food is comparable to earning a conservative return without the risk of wide market fluctuations. Additionally, you don’t want the food to sit on the shelf and spoil, either — i.e., earning nothing in a checking account.
Now it’s time to eat the food. This is the money you live on — the money that literally puts food on the table. Assume you need a one to three year supply. This money must have stable value, liquidity, and safety because it must be there when you need it. It is not possible for this money to provide meaningful earnings or growth because stable, liquid, and safe (your primary objectives) does not pay. Your kitchen money comes from fixed-income sources (retired pay, Social Security), savings, checking, and money market accounts.
Before you develop your food supply chain, analyze how much food your crops can produce and if this meets your food requirements. How will your fixed-income sources reduce your need from the food chain? Will your crops provide an abundance of food in the pipeline, or will you need to go on a diet? Once you have a handle on the amount of food possible and control over your appetite, you will be ready to establish your supply chain.