Setting aside a few years of spending money in so-called safe investments for clients is key to creating a regular income for retirees, according to an educational session at the annual conference of the National Association of Personal Financial Advisors being held this week in Washington.
“Two to five years of expenses is what most people use for their buffer,” said Frank Presson, principal at Presson Financial Associates LLC of Tucson, Ariz., a co-presenter at the session.
Advisers also need to determine whether to keep the cash in laddered certificates of deposit, bonds or in money market funds.
“I use a four-year ladder of CDs,” said Nancy Nelson, who runs an eponymous Olympia, Wash., investment-consulting practice and was a co-presenter at the session.
The strategy involves buying CDs and adding a new 4-year CD each year as the one-year CDs mature and cash is spent. The process of creating the ladder begins about four years before the individual retires, Ms. Nelson said.
CDs are added only if the client is able to sell other investments without a loss, she explained.
The laddered funds are separate from the investment portfolio invested in stocks and bonds, Ms. Nelson said.
She believes that the strategy helps mitigate the losses in downturns, including this one.
“I didn’t get upset when [my clients’ investment] account went down, because I know that there are a few years of safe money there,” Ms. Nelson said.
Still, not all advisers use CDs.
“Especially in this environment, which forced some to sell equities when they didn’t want to, I like to use a combination of a bond ladder with a short-term-bond fund. I think I can get a little bit higher yield [than CDs],” said Gordon Bernhardt, president of Bernhardt Wealth Management Inc. of McLean, Va.