Despite the stock market's history of wealth creation over the long run, on a day-by-day basis, it can be quite volatile. Heck, there are occasionally even decade-long periods when the market winds up below where it was when it started. If you still have time before you need to get at your money, you can deal with that volatility. In fact, with time on your side, a drastically down market can be a great time to go value hunting for cheap stocks.
While that risk is real, currently, we're still benefiting from the longest bull market in history. If you've been invested through it, you might be looking at your portfolio today and realize that you're ahead of where you need to be at this stage in your life in order to meet your ultimate retirement goals. If so, congratulations -- you've won the game. For at least part of your money, it's time to quit playing.
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Why now could be a great time to take money off the table
No matter how great your investing strategy ultimately is, at some point, you'll want or need to spend the money you've earned. Once you reach that point, the market's downward swings can be damaging to your long-term financial health if you're not prepared for them. As a result, you need a plan for withdrawing money that's different from your plan for building your nest egg.
It's crucially important that your withdrawal plan be in place before you need to spend your money. Otherwise, you'll likely find yourself in a spot where you're forced to liquidate more of your investments than would really make sense, just because you have a bill coming due that you have to pay. Indeed, a good rule of thumb is to not have money invested in stocks that you expect you'll have to spend in the next five years.
So, if you have a life event coming up within the next five years that you'd like to use your portfolio to help cover, now would be a great time to convert the money you'll need to a lower-risk investment. As wonderful as the market has been recently, there remain no guarantees that it will continue to rise. If the market has given you what you need to reach your goal, take it, because that generosity may be reversed at any moment.
Where to put your money instead?
Of course, there's a clear trade-off involved in investing. By taking money out of stocks, you are giving up potential returns. In today's low interest rate environment, you are not likely to find parking places for your money that provide high rates of return. That's OK -- to paraphrase the illustrious Will Rogers, this is a case where you should be more interested in the return of your money than the return on it. What you're after is a high likelihood of getting your money back when you need it to spend.
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As a result, for that money, a savings account or a CD set to mature just before you need the cash is a perfectly acceptable place for it. If you're looking for not just a little more than your bank will offer, you can look at buying Treasury or high quality investment-grade corporate bonds or bond ETFs. Just be sure that you're matching the maturities to about when you'll need the money to spend, as bonds can fluctuate in value and are only assured to be worth their face value as they're being paid off.
If you're up against retirement or some other situation where you'll be routinely pulling from your portfolio for a long time to come, a bond ladder can be a great option to consider. By buying a series of bonds scheduled to mature on a regular basis, you can deliver cash to yourself when you need it to spend. Just remember that bonds mature, so once you set up your bond ladder, you must maintain it over time in order to keep the cash flow coming as long as you need it.
Remember to invest for the long run, even if you've reached your goal
Even if you've reached a point of complete financial independence, chances are that you'll still need to keep money in stocks for the long haul. After all, with even 30-year Treasury bonds yielding a mere 2.2%, you'll likely need a higher overall return to protect your purchasing power from inflation over time. While stocks are too volatile to rely on for money you need today, for money you need several years from now, their higher potential returns give you a better shot at that long-term goal.
Ultimately, as you transition to when you rely on your portfolio to cover some or all of your costs of living, you'll want to strike that balance between short- and long-term money. After all, just because you've won the game doesn't mean you can't do even better over time. Still, doing so in a balanced way will let you protect what you need while still reaching for the hopes of an even brighter future.
