Our Financial Planning & Investment Principles
The Glide Slope to Retirement
Q: What do retirement planning and landing an airplane have in common? A: If you get it wrong, the results could be disastrous.
When it comes to retirement, there was a time that many Americans had the option of operating on auto-pilot. At age 65, you would receive a defined benefit from a company or government sponsored pension plan, Social Security, maybe even company health insurance. Checks arrived reliably once a month and you did not have to worry about asset allocation, longevity risk or Medicare Part C.
Today however, most prospective retirees will receive a lump sum distribution from a 401(k) plan at 60, 65 or 70 years of age and are expected to ‘wing it’. Yet most Americans are no more qualified to manage their retirement investments than to land a plane. In order to ensure a safe landing, pilots meticulously follow a detailed checklist. Nothing is left to chance. At Heron Wealth we believe that you should approach your retirement in the same way.
Asset Class Risk Thermometer
Risk and reward go hand in hand. Cash in your pocket carries no risk but it does not give you an investment return. Investing in a private business may be rewarding financially but has concentration risk (i.e. all your eggs in one basket) and liquidity risk (you can’t get your money out when you need it).
At Heron Wealth we invest our clients in a range of asset classes to optimize the trade-off between return and risk. We only invest our clients in assets that are liquid (meaning that you can get your money out in 24-72 hours) and transparent (the current price is available from numerous sources).
Examples are stocks, bonds, mutual funds and ETF’s.
We will not invest our clients in real estate, private businesses, limited partnerships, private equity or hedge funds. While such investments may offer the promise of high returns with less risk, they violate our rules about liquidity and transparency.
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Purpose Based Asset Allocation
Purpose-based asset allocation means that our clients’ funds are invested for short term, medium term and long term goals. The benefit of this strategy is that our clients have funds available for short-term needs while receiving the benefit of higher returns in riskier assets.
For example, if the purpose of a client’s investment is retirement, and they are more than 5 years away from retirement, we can allocate those assets to more risky (volatile) securities like stocks and commodities.
If our client also has short-term requirements, for example a down-payment on a home, we will invest a percentage of their assets in securities like money markets and treasury bills that have virtually no principal risk (i.e. the risk that your investment will decline in value to below the amount you invested, the ‘principle’).
Three Bucket Retirement Income Strategy
We are proud to share that among the 30% of our clients who are retired, depending entirely on their portfolio, none have ever experienced a reduction in their monthly draw.
We accomplish this through our 3-bucket retirement income strategy. We invest 60-70% of the client’s portfolio in assets such as US and international stocks and commodities, which generate higher returns but are also riskier (more volatile) assets (the ‘risk’ bucket).
We rebalance our clients’ portfolio once or twice a year, as needed, flowing excess balances from the ‘risk’ bucket to the ‘fixed income’ bucket which is invested in corporate and municipal bonds and preferred stock: lower returns but also lower risk.
The excess in the ‘fixed income’ bucket flows into the ‘cash’ bucket, which is invested in low return, low risk assets (money market securities). Each month our clients receive the same exact draw.
In general, we have a year’s worth of retirement income in the ‘cash’ bucket and four years in the ‘fixed income’ bucket which means our clients can survive a five year drought in their riskier assets (i.e. their stock market investments). An example of a drought is the 2007-2010 period of financial turmoil.
Smooth Sailing requires Thorough Planning
Experienced sailors like our President David Edwards know that you can only make a successful trip when you plan in advance. Making sure you have enough food and water on board and accounting for weather patterns are just two examples.
Our approach to wealth management works in the same way. Before we make investment recommendations to our clients, we create a thorough financial plan with them to make sure the investments we choose are suited to their specific financial requirements. Do you need most of your funds for your retirement? Are you thinking of buying a home in the next couple of years? Do you have an emergency fund of cash available to you?
These questions are an important part of our onboarding process. Knowing your exact situation means that we can allocate one of our team members to deal with your specific requirements, much like a captain assigns tasks to his crew. Our technology platform allows us to provide alternative scenario’s within seconds which means we can steer clear of bad weather.
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