The 4-Box Strategy and How It Can Help Retirement Investors Manage Market Volatility Worries

Typical retirement investment wisdom advises that when market volatility hits, investors should stay calm, sit tight, and ride it out. 

While that advice might work for someone with 20 or 30 years to go before it’s time to sail off into their golden years, what about pre-retirees who are within 5 to 10 years of retiring? At this point, many are focused on protecting, rather than accumulating, wealth. 

About ten years ago, in an attempt to help his clients dig out from the aftermath of the global financial crisis, certified financial planner Farrell Dolan created what he called the 4-Box Strategy for determining retirement income needs.  

His approach may give some comfort to pre-retirees who are dealing with market jitters now.

• First, estimate your post-retirement income and expenses. Divide your expenses into two categories: non-negotiable (housing, food, transportation, medical) and discretionary (travel, hobbies). 
• Second, divide your income into two sources: lifetime income (from Social Security and defined benefit pension plans) and investment income (from 401(k) plans, IRAs or taxable investment accounts). 
• Third, link your lifetime income sources to your non-negotiable expenses. Lifetime income is guaranteed and not subject to any investment risks. If you can cover your non-negotiable expenses from Social Security and pension plan income, you should feel some immediate relief from volatility-related anxiety. If there is a gap between your lifetime sources of income and your non-negotiable expenses, you may want to consider purchasing a fixed annuity product, which can provide a guaranteed stream of income. 
• Fourth, use income from retirement and taxable investment accounts to fund discretionary expenses – those non-essential lifestyle activities, such as travel, entertainment or hobbies, that could be postponed or reduced if markets tank. Here is where proper asset allocation comes into play. Ideally, your goal is to produce enough income from your investment portfolio to cover these non-essential but pleasurable activities while maintaining asset growth over time. 

This method also scratches the itch that many investors experience when markets go topsy-turvy. That is the urge to do something – anything – to relieve their anxiety about loss.  

If investors know their portfolios are aligned with their investment goals, risk tolerance and time horizon – and that they can simply reduce or delay discretionary expenses – Dolan theorizes that they’ll be more likely to leave their portfolios alone. 

That last part is important because making changes to your portfolio based on emotions is never a good idea. Many investors panic when markets drop and start tinkering with their investments.  

It’s hard enough to know when to sell; it’s even more difficult to know when to get back in. Investors who sell out of the market when it falls not only violate one of the most basic premises of successful investing (that is, buy low and sell high), they also tend to stay out of the market for too long, and miss out on the chance to recoup their initial losses. 

Need a little help dealing with the recent market roller coaster? Let us work with you to assess your retirement income needs. Get started with today a complimentary, no-obligation conversation with one of our financial advisors.