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The Cash Wedge© Strategy

Manage Your Retirement Income with The Cash Wedge©

Investing in the stock and bond market can certainly help grow your portfolio for the future, but market volatility can drastically impact your retirement savings once you start withdrawing income. That’s why managing your investments wisely is crucial if you are drawing a retirement income from them. Using The Cash Wedge© strategy in your portfolio can help you minimize the effects of a short-term downturn, and still allow the rest of your portfolio to participate in the markets.

Investment Math© -- Accumulation vs. Withdrawal

When markets are volatile, it makes a big difference whether you are adding assets or withdrawing assets from your portfolio. When left intact to grow for the long term, the order of the returns on your investments will not affect your portfolio’s long-term average growth rate.  This is 'accumulation math.'  But 'withdrawal math' works very differently. When you begin to take income from your investments, the order of the annual returns on your investments makes a big difference. If returns are low in the initial years, the capital base may be eroded and that makes it very hard for the portfolio to recover when markets turn back up again. 

Making withdrawals from investments that are volatile can significantly impact your portfolio. Instead, consider adding The Cash Wedge© to your portfolio composition so that retirement income is drawn from a more stable source.

Plan for your future income needs

We first proposed this strategy in our earlier book -- The Structure of Retirement Income from CCH Publications in 2001.  Working with your advisor, a portion of your retirement income (usually one year's worth) is allocated to a conservative, highly accessible investment such as a money market fund or high daily interest account. We named this portion of your portfolio The Cash Wedge©. This is from where you draw your retirement income. The second and third year’s income is allocated into a guaranteed short-term investment, such as 1 and 2 year GICs, bonds or an investment savings account.

On maturity, the short-term investments are used to replenish The Cash Wedge© and provide guaranteed income for years two and three respectively. The rest of your savings is left to grow with time in a diversified portfolio that meets your personal financial needs. Over time, any profits are moved from the invested portfolio into a cash position to create income for year four and subsequent years.

Minimize your portfolio risk with The Cash Wedge©

Because you are drawing income from The Cash Wedge©, other portions of your portfolio are given time to overcome volatility. This strategy allows you to avoid the “timing” problems caused by withdrawing income from less liquid portions of your retirement portfolio in times of short-term market volatility.

Benefits of The Cash Wedge©

By using The Cash Wedge© strategy, you can reduce your portfolio risk. It allows you to better insulate your portfolio from the negative effects of market volatility during the most critical periods. Over the long term, you have the potential to earn more from your portfolio.

Investment Math © and The Cash Wedge Strategy © - copyright Rarestone Financial Series Inc.