Minor Change to Retirement Salary®

We’re making a minor change to many of the Retirement Salary® portfolios, but these changes will not impact all clients in the program. This will depend on your current allocation, funds, and cash reserve needs.

When we look at refilling the cash reserves bucket, we’ll typically target one year of cash needs plus 2% of the account value. We trim positions that have done well relative to other asset classes in the portfolio. We avoid selling positions that are in negative territory.

For much of the last ten years, interest rates on cash (savings, money-market funds, etc.) have been close to zero. So there really weren’t any good options for increasing the yield on the cash reserves – at least not any safe options! After all, this money has to be available when you need it, so we cannot afford any fluctuation in value.

This brings us to the first change. Interest rates are ticking higher and higher, working their way into cash investments. We are looking at placing some of the cash reserves in a higher yielding Schwab Money Market Fund. The current yield is 1.98% – much better than a typical bank deposit fund. So where it makes sense, we are going to allocate some of the cash reserves to this money market fund. Depending on the amount of cash reserves we have to work with, this may or may not work in your particular situation.

The second change is within the bond funds. We have always looked at the bond portion of the Retirement Salary® portfolios as the second tier emergency cash reserves. The thought being that if we enter into a prolonged downturn in the stock market, we could tap into the bond positions if the cash reserves are depleted. This would enable us to avoid selling any equity positions while they are down.

While we are very confident in our bond positions, we felt that an added layer of security may be necessary for Retirement Salary® portfolios. Our bond positions are very diversified – holding government, corporate, agency, mortgage, and international fixed income securities. We do not, however, have any dedicated U.S. government bond positions.

Historically, during stock market downturns many investors will flee to the safety of U.S. government bonds, which can lead to positive returns in this fixed income sector. That’s not to say the other bond positions would not hold their value. Many probably would. But, it’s a safer bet to assume the government bonds have a better chance of performing well during times of stock market stress.

This leads us to the decision to swap out two of the more aggressive bond positions for two dedicated government bond positions. One of the bond funds is short-term in duration (1-3 years) and the other is intermediate-term (3-6 years).

We feel these modifications will help us to better weather any storms in the future for our Retirement Salary® clients. Again, this will not impact all clients in the program. We anticipate these changes being implemented gradually over the next month or so.