What Phase of Investing Are YOU In?

Welcome to the ‘Understanding Retirement Planning & Investing’ series! If you’ve missed the first few posts be sure to check them out!

Phases of Investing

As a financial advisor and somebody that regularly helps people plan and transition into retirement, it’s quite difficult to get people to understand that the way you should be invested during retirement is different than the way you should be invested when you’re young!

Your Phase of Investing DETERMINES Asset Allocation

Last week I touched on Asset Allocation and helped you to understand that a certain percentage of your retirement assets should be tied to stocks, bonds, and cash.

The percentage that is tied to each depends on your risk tolerance but ultimately it should depend on what stage of investing you’re in.

The 3 Phases of Investing

1. Accumulation Stage

This stage of investing is pretty straight forward: it’s the time of your life that you’re accumulating assets.

It’s the stage that 95% of advisors talk about and it’s the stage the majority of advisors know how to handle.

This stage of investing has a few important components:

  • Time-frame: from the day you start working until 5-10 years prior to you retiring.
  • Inflation: the ultimate risk for people that are in the accumulation stage is inflation. If you’re in this stage of investing it’s imperative that you’re outpacing inflation and not losing purchasing power.

Knowing that your biggest concern is outpacing inflation during your accumulation years, you should have an asset allocation that matches that concern.

Despite what most people think right now because of all of the fear mongering, STOCKS have been the best way to outpace inflation over the last 70 years. With that said, investments such as real estate, gold, and bonds have also had periods of time that they outpace inflation (or at least keep up with it).

So, despite whatever your emotions tell you to do, and even though you may be so tied to your money that you’re afraid to lose any of it in the market, you should have a more aggressive portfolio allocation. Meaning, you should be more heavily tied to stocks than bonds or any other asset class.

Something along the lines of a 75/25 or higher allocation may be appropriate depending on the situation.

If you have no idea where your asset allocation should be, I was informed of this pretty awesome calculator that helps you determine Asset Allocation: 401k Allocation Calculator.

2. Preservation

This has really been a new phase of investing that was added in the last 10 years or so and it’s one that many people have difficulty grasping.

Considering it’s not widely discussed and people aren’t aware of the different opportunities to help in this phase, it’s difficult for people that have been accumulating for 20-30 years to change their mindset and focus on more important things such as:

  • Preservation of assets
  • Keeping up with or outpacing inflation by a small margin

Ideally, if you’ve built up enough assets during your accumulation years, you can transition to the preservation phase approximately 10 years before you plan to retire.

However, some people won’t be able to start preserving assets until 5 years prior to retirement, and the majority of people may never have this luxury as they’re doing all they can to chase returns since they didn’t save properly from the beginning.

A few co-workers and I have shared stories about parents or grandparents that fell victim to stock market crashes and it always reminds me of a person I knew quite a few years back…

He had been working his whole life and actually had done a pretty good job with accumulating assets. He was in his mid-50s and he planned to retire in 3-4 years (this was back in 2007).

Well, having the mindset of most people this person was stuck in the accumulation phase and when 2008 hit they lost quite a large sum of their retirement savings.

Needless to say but that person is still working today.

The preservation stage basically says ‘I can’t afford to lose any of the money that I’ve spent years saving, but I also need it to earn a little more than what the traditional “safe money” options would offer.’

This is a hard stage for boomers and seniors to grasp, but it’s important to change the mindset or you’ll run the risk of working far past what you anticipate – especially if things take another turn for the worse.

Think about it for a second, if you’re on pace to retire when you WANT and you’re getting within a few years of that date, why chase returns while taking on unnecessary risk? What’s the point?? There is a fine line between being a wise investor and being greedy.

One of the biggest mistakes we see is that people take on too much risk when they don’t have to, and the people that need the high returns aren’t taking on enough.

While there isn’t a perfect asset allocation for the preservation phase of investing, common sense would suggest that you scale back your allocation to a more moderate approach (maybe 50/50 or less depending on how you feel about bonds in this low-interest rate environment). More importantly, depending on the person and their situation, insurance products such as annuities may offer guaranteed returns with ZERO market risk.

3. Distribution

Just like there are asset classes that outpace inflation better than others (primarily stocks and sometimes bonds, gold, and real estate), there are asset classes that are better suited for the distribution phase of life.

The distribution phase of investing is when you’ve stopped working and now rely on your assets to provide an income stream (ideally one that you cannot outlive).

As a retiree, there are really only a few ways that you can create an income from assets:

  • Bonds that pay interest
  • Income from rental properties
  • Stocks that pay dividends
  • Interesting-bearing CDs
  • Annuities that offer lifetime income streams
  • Drawing down a certain percentage of your assets on your own

I’m often amazed at how many people choose the last option. Frankly, it scares the BAJESUS out of me! The reason it scares me is the biggest risk in the distribution phase of investing is outliving your assets.

The people that typically resort to drawing down a percentage of their assets are still stuck in the accumulation mindset and haven’t realized (or been educated) that there are better ways to draw income. Think about it for a moment, if you have $1,000,000 saved for retirement and are drawing down 5% ($50,000/year) to live off of. What happens if the market tanks 40% and now you’re only pulling in $30,000? Not to mention, that $30k you just pulled from your ever-depleting $570k nest egg will get lower and lower each year unless the market bounces back significantly!

Each situation is different and there are pros and cons to each option, regardless of which phase you’re in. The solution typically lies where the person is most comfortable operating and more often than not it’s determined by what jargon they’ve been fed their entire lives.

The important thing to remember is that your mindset must change as time goes a long. If you’re unwilling to change or fail to accept a different investment approach based on your phase of investing, then you may run into serious problems down the road (well, unless of course you’re just rolling around in dough).

About the Author

By , on May 28, 2012
Andy Tenton
Andy is a 30-something New Yorker who turned his financial life around. He took charge of his finances, got out of debt, and is now working his way toward financial success. He is the publisher of WorkSaveLive.com.

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  1. Well explained Andy. It will surely help people to understand in which phase they are.

  2. Distribution stage. I almost can’t wait, except for the whole getting old thing.

    I find it helpful to keep the separate stages in mind the whole time. It’s not a game of, I get as much as I can until 60, but more like 55.

  3. AverageJoe says:

    I think Joe Morgan nailed it. If you aren’t going to spend all of your money in the next five years, why would you put it in a place that’s appropriate for a five year or less window? It’s better to think about “when will I need the money” than “when am I going to retire.” Inflation scares the bejezuts out of me!

  4. Jefferson says:

    We are really in the pre-Accumulation phase, but hopefully will be crossing over in the next 12 months 🙂

  5. We’re in the Accumulation Stage right now. It’s going a bit slower than I would like it to go, but there isn’t much I do about that right now. At least we’re making progress even if it’s kinda slow. 🙂

  6. Great breakdown Andy. I am still in phase 1. But I spend a lot of time planning out phase 3. My plan is to withdraw only about 2% rather than the normal 4%. I will also make sure to use a mix of dividends and bonds. And hopefully I can sell my blog for millions 🙂

  7. Awesome, awesome post as usual Andy. You’re so smart!

    Well I’m only in the first phase, which I suppose is better than not being in any phases yet. I’m definitely in the accumulation stage and will be for quite a long time. I still need to acquire a house, more savings, and diversify my investments more.

    I wanted to ask you – I currently get stocks at a discount through my company but I will be quitting soon. Do you happen to know what the best option would be? Sell? What happens if I just leave everything in there…does this just stay in my brokerage account? Can I transfer it to my 401k or something if it’s with the same brokerage? I suppose I should call Fidelity, but maybe you have some insight that I am not aware of haha. Thank you so much!

  8. Joe Morgan says:

    The ideal for the last stage isn’t any single option you listed, but a mix.

    Anyone foolish enough to have the money they need in the next 3 years sitting in an asset that would lose 40% of it’s value is going to have problems like the ones you outlined.. 2008 is a great example of what you should plan for when you’re in the 3rd stage.

    If you had that 1,000,000 in stocks and bonds, you would have had to go from 50k to 30k and suffered the additional loss in your investment of what you withdrew.

    However, if you had 150k (3 years of income) in multiple “safe” investments that protect principal (ex: CDs), then you would have your income for the next 3 years and would have time for the remaining 850k in riskier assets to recover.

    It’s a simple example that ignores things like increased withdrawals for inflation and only considers 2 asset “buckets”, but you get the idea.

    Great post by the way. I see too many articles on retirement planning that focus on stage 1 as if it’s the only stage!

  9. I would be in the accumulation stage.

  10. Katie says:

    I am in the start of the accumulation phase. I actually have only bought one stock and that was in the heat of the moment kinda thing. For some reason I keep putting off investing further. I just want to feel like I understand what I am putting my money into.

  11. I wish that I could say that I’m further along in my investing, but unfortunately I’m still in the accumulation phase. I had gotten a late start and made some horrendous decisions, which led me to fall so far behind. On the plus side, things are a lot better now than they were in the past.

  12. Edward Antrobus says:

    Like Modest Money, I’m not even sure I’m up to the Accumulation stage yet. I don’t even have $1000 invested! RIght now, I’m more into debt repayment. But once I have the last credit card paid off and I only have lower-interest student loan and mortgage debt, I plan on splitting my side income 75/25 towards debt repayment and retirement investing.

    When it comes to investing, I tend to find myself stuck. I know that with my age, I should be fairly aggressive with my investments. But I find I have a low risk-tolerance and look towards lower risk investments, like bond funds.

  13. I am right there with Emily. I am definitely in accumulation and will be for a long while. I do have some shorter term investments that are more conservative like my new car fund which I anticipate having to touch in 5-10 years.

  14. in trying to get to FI, especially if you are young, i feel its important to obtain high IRR on your investments to compound and grow the portfolio. i understand asset allocation and diversification, i just think it is important to save money and be ready to invest it when one can obtain those robust returns >50%. big believer in active management, investment that one can control and steer the outcome ie real estate right now.

  15. Accumulation. Our target date retirement funds have us at 90/10. Plus we have some short-term investments that are more conservative.

  16. Unfortunately I’m not even on the spectrum yet because I’m still paying off debt. Money is accumulating in my pension account that my employer pays, but that’s about it. I look forward to getting to the accumulation phase and devouring tons of data and info.

  17. I think the past 5 years have been very illustrative for anyone who has investments. The wild ride down and back up has tested investor’s mettle.

  18. Modest Money says:

    Well it looks like I’m not even on the map yet. I’m in the ‘I’ve been too clueless to properly invest’ phase. I’ve got some money saved up for a mortgage downpayment, but I’ve got a lousy allocation setup. As I get my finances in order I’m gonna have to seriously move onto the accumulation phase.

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