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Managing Liquidity

In the blog post titled The Danger of Relying on the 4 Percent Rule, I talked a little bit about sequence of

returns risk, which is the risk that low returns or losses during the early years of retirement can

significantly impact the longevity of your retirement funds—especially if you’re liquidating positions in

order to take income out of the account.

One way to help minimize sequence of return risk is to find ways to maintain liquidity in your portfolio,

since that will mean you’re less likely to sell investments, realize losses and reduce your opportunities

for future gains. In this two-part series, I’m going to talk about five ways you can maintain liquidity in

your retirement portfolio. Today, let’s talk about CD ladders, bonds and dividend stocks.

1. CD ladders: CDs are a popular choice for conservative investors. Their interest payments create

ongoing liquidity, but if they aren’t structured correctly, they can lock up your funds and impose

stiff penalties should you need to liquidate early. A CD ladder is a method of buying multiple CDs

with varying maturity dates so that there’s routinely something maturing and paying out. This

not only keeps you liquid, it also allows you to routinely reinvest the freed-up funds into more

competitive products.

2. Bonds: Bond interest (or coupon) payments help create a stream of income for a retiree, as do

the principal repayments upon maturity. However, you must be careful to avoid low-rated

bonds because even though they will have a more aggressive interest rate, they are more likely

to be defaulted on, which means you can lose both interest payments and principal. On the

other hand, you must also remember that triple-tax-exempt municipal bonds (which are

generally highly rated) may not be the best choice for a retirement account. The reason for this

is that their low rate is offset by tax advantages that you already have access to simply by having

an IRA. It’s also a good idea to ladder bonds the same way you would CDs so that you aren’t

locked into a low interest rate as rates rise for new bond issues.

3. Dividend stocks: Stocks that pay dividends create both an income and potential for future

growth as the value of the underlying stock grows. However, there are risks involved. Dividends

aren’t guaranteed and, as such, their value can fluctuate, making it difficult to rely on them for


Check in next week for the second part of this series when we’ll talk about annuities and Social Security


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