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Covering Your Retirement Bases – Retirement Income Diversification

A friend called me last night from Portland and she was a little anxious about her investment portfolio. She’s 34 years old, single, no student loans, and works as a pharmacist.

She finished school with minimal student loan debt and earned the majority of her income working for a large medical group. Just a couple of years ago she got into pharmaceutical consulting which has earned her the same annual income with fewer invested hours.

Her net worth is in the $850k range which includes real estate, index funds, cryptocurrencies, and a few individual stocks. Her lifestyle expenses are minimal and she doesn’t have any expensive hobbies. So why was she having all this anxiety?


Anxiety over Early Retirement

Her anxiety was because she was already financially independent but didn’t really feel different. She had reached her milestone but had zero desire to retire early and just didn’t feel like anything had changed; therefore, something must be wrong.

She asked me if I felt the same. No, when I did the math in 2016 and realized that I was financially independent the very first thing I did was to celebrate that milestone and that’s all I could think about for the next 2 months.

I couldn’t wait to get the fuck out of medicine and set out to achieve that goal. I’m still in the process of achieving that goal, so, stay tuned.

Compulsion to Retire

I am not sure what retirement means to her, we never really discussed that topic but she is a productive person. Sitting back and living off of her investments is the last thing I picture her doing.

Financial independence gives you options and freedom. But you can, without a doubt, continue doing what you’re doing. You can enjoy the shit out of your current full-time job, or drop down to part-time, or you can change gears altogether.

The compulsion to retire after reaching financial independence may have been something I put in her head. We laughed about it because another one of her friends is also an early retiree in his 30’s. She just assumed that after financial independence you naturally retire.


Diversifying Retirement Income

I talked about building income diversification and so now I want to talk about retirement income diversification.

She was anxious about this early retirement business but she was getting panic attacks over her retirement savings, worrying that it was far too little and that she needed a lot more. She had the $1M number in mind – even that didn’t seem like enough.

My opinion is that there are a few different categories of retirement income worth having to ensure a safe retirement. My personal list of retirement income looks like this:

  1. investment income
  2. earned income
  3. social security
  4. real estate
  5. cash
  6. private equity
  7. pension or annuity
  8. foreign investments

And this level of retirement diversification is perhaps overkill. The chance of such a diversified retirement income failing is the same as me getting a hot chick’s number at a club.

The only items she was missing were the last 3 items on the list. She agreed that it would have been silly to pursue those in light of what she had already accumulated.

What Else to Invest in

She wanted to know what else she should invest in. She maintains a lot of cash on the sidelines.

Fortunately, the past few years – which is when she accumulated the majority of this cash – have been kind to her cash-reserves; we just haven’t seen that much inflation.

But moving forward she would benefit from putting some of those dollars to work for her. I suspect she’ll always keep $100k-150k in cash – that’s what makes her feel comfortable.

She has very little faith in securities. Stocks and bonds, whether individual or indexed, seem shady to her. I totally get that and don’t see why she would force herself into that mold if it’s not the right fit for her.

Her real estate investment has been the biggest driver of her portfolio. She understands real estate and she knows how to turn a profit from it. In my opinion, she would be served better, at such a young age, by investing more time, money, and energy into what is already working for her.

Should real estate let her down, she can always switch gears because she has time on her side. And if she continues rebalancing her portfolio based on asset classes, she should do well regardless of what the economy dumps on her doorstep in the future.


Disaster in Retirement

Catastrophic losses in retirement can usually be protected against, especially when one builds adequate diversity into their retirement portfolio.

That’s why a good financial advisor is important to have. They can point out where you are excessively exposed to risk. They can recommend the right insurance product(s). And they will help you see around the bend.

They can also convince you of adjusting your asset allocation as you get older or as your situation changes. A static asset allocation throughout your entire lifespan rarely makes sense.

Of course, I could be talking out of my ass but that’s why I write this blog. Hopefully when I’m 90 years old – or dead at 45 from a cocaine overdose – someone will read this blog, back-test it, and be like, damn, this shit works.

Common retirement disasters:

  • major health issues
  • divorce
  • lawsuit
  • major drop in asset value
  • inadequate emergency funds
  • overestimating asset returns
  • investor panic