A Smart Way to Distribute Money To Your Retirement

Time segmentation is a strategy that can be used to invest in retirement. It involves matching investments to the point where they will have to be withdrawn to meet retirement needs. Let’s look at an example.

Suppose Jan and Wacława are 60 years old. They plan to retire at the age of 65. They want to be sure that their first ten years of retirement income are secured. If they use a time segmentation approach, they may purchase bank deposits, bonds or other secure securities (or a combination of these things) in quantities that will allow them to reach age and will be available in the year in which they need them.

An example of time segmentation in practice

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Let’s assume that Jan and Wacława know that at the age of 65-70 they will have to pay PLN 50,000 a year to cover living costs. They find a number of deposits and bonds generating from 2% to 4% of income, which will expire in the years in which they will need these funds. This is called a ladder strategy. It works as follows:

  • Deposit No. 1 paying 2% – expires at the age of 65 Jan.
  • Deposit No. 2 paying 2.5% – expires at the age of 66 Jan.
  • Bond 1 paying 3% – expires at the age of 67 Jan.
  • Bond 2 paying 3.5% – expires at the age of 68 Jan.
  • Bond 3 paying 3.75% – expires at the age of 69 Jan.
  • ten-year investment with a fixed annual income of 4% – expires at the age of 70 Jan
  • Bond 4 paying 4% – expires at the age of 71 Jan.
  • Bond 5 paying 4.1% – expires at the age of 72 Jan
  • Bond 6 paying 4.15% – expires at the age of 73 Jan.
  • Bond 7 paying 4.2% – expires at the age of 74 Jan

Using the above schedule

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In the sections below I present the required investment needed at the age of 60 Jan. Including the interest he would earn to provide the needed PLN 50,000.

Deposit No. 1 paying 2% PLN 45,286.00
Deposit No. 2 paying 2.5% PLN 43 114.00
Bond 1 paying 3% PLN 40,654.00
Bond 2 paying 3.5% PLN 37,970.00
Bond 3 paying 3.75% PLN 35,888.00
10 years of fixed annual payment of 4% PLN 34,601.00
Bond 4 paying 4% PLN 32,479.00
Bond 5 paying 4.1% PLN 30,871.00
Bond 6 paying 4.15% PLN 29,471.00
Bond 7 paying 4.2% PLN 28 107.00
Total needed: PLN 358 451.00

Let’s assume that Jan and Wacława have a retirement account and other savings and investment accounts with a total value of PLN 600,000. After using part of their savings to cover the above time segments (which corresponds to their first ten years of retirement), they have PLN 242,549. This part of their savings and investments will not be needed for 15 years.

If they invest everything in shares (preferably in the form of stock index funds) assuming a rate of return of 8%, it will increase to PLN 766 234. We call this a growing part of their portfolio. In years where part of the growth is doing well, they would sell part of the stock and extend the time segment. By doing so continuously, they can always count on seven to ten years, being aware that they have safe investments that will allow them to cover their expenses. They have the ability to flexibly profit in good years and give him time to regain good shape in a bad year.


Notes on these calculations

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In these calculations I assume that all interest could be reinvested at the given interest rate, which in reality is often not possible.

I also don’t take inflation into account. In fact, Jan and Wacław would need more than PLN 50,000 in five years to buy the same amount of goods and services they would buy today for PLN 50,000. You can increase the needed PLN 50,000 a year by 3% over the whole period, until necessary. Later, discount them back for the return on investment to be used. You will need to make calculations based on your own inflation needs and assumptions.

If Jan and Wacława add money from the state pension to all this, maybe the required income will not have to be PLN 50,000 a year, only less. They may need the full amount of money sooner and then less when they start using social security.

Benefits of time segmentation

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Using a time-based approach, you don’t have to worry about what the stock market was doing today, or even what it is doing this year. A growing portion of the investment portfolio will not be needed for fifteen years.

Time segmentation is completely different from the traditional approach of systematically withdrawing assets. The traditional approach to allocating funds determines what percentage of funds should be in cash, bonds and shares. The basis of this approach is the annual volatility that you are ready to face. Then configure what is referred to as a systematic withdrawal plan to sell enough assets for each asset class each year (or each month) to meet your retirement needs. With a time approach, the annual variation is not relevant to your goals.

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