One of the most common concerns we hear from clients nearing retirement is, “Will I have enough?” Retirement isn’t just about building a nest egg; it’s about knowing your wealth can provide the life you want without the stress of daily market swings. At PDS Planning, we’ve developed a proven strategy over many years that we call the Capital Reserves approach—a framework that has helped our clients weather multiple market downturns with confidence.
What Are Capital Reserves?
Think of capital reserves like canned goods in the storm cellar. Just as you’d want enough provisions to weather any storm, we believe retirees should have enough stable assets set aside to cover their portfolio withdrawal needs during market downturns without being forced to sell growth investments at a loss.
Capital reserves are the portion of your portfolio invested in stable securities—cash, CDs, and short-term fixed income—that can cover your expected withdrawal needs for years into retirement. This isn’t just emergency cash; it’s a strategic allocation designed to give you flexibility and peace of mind during volatile markets.
How Much Should You Hold in Capital Reserves?
We prefer to see clients have at least 7-10 years of their expected withdrawal needs in these types of assets. Why this specific timeframe? Historical data provides the answer.
Looking at bear market recoveries over the past 90 years, the average recovery (peak-to-peak) is about 3.5 years. However, the most significant downturns—like the Great Recession (2007-2009) and the Tech Bubble (2000-2002)—took about 6 years each to fully recover. By maintaining 7-10 years of capital reserves, you’re prepared for even the most challenging market environments.
Let’s look at a practical example: If a couple has pension and Social Security income of $75,000 each year and total expenses of $150,000 per year, they need to withdraw $75,000 annually from their portfolio. With our recommended approach, they would hold $525,000 to $750,000 (7-10 years × $75,000) in capital reserves.
Why Capital Reserves Work
- Weather the Storm Without Panic
- When markets drop significantly, many retirees feel pressured to sell investments at the worst possible time to fund everyday expenses. Capital reserves eliminate this pressure. If you have enough capital reserves, then your focus can be on things other than money.
- Historical Perspective Provides Confidence
- The average bear market drops 37.5% and lasts 1.2 years, with recovery periods averaging about 3.5 years. Even during the Great Recession, when stocks dropped 56%, investors with adequate capital reserves could wait for the recovery—and were rewarded handsomely. Those who weathered the storm saw their investments not only recover but continue growing beyond their original values.
- Maintain Your Long-Term Strategy
- Having sufficient capital reserves allows you to stay diversified and avoid reactionary decisions when emotions are running high.
Our Capital Reserves Strategy in Practice
We spend considerable time understanding and modeling our clients’ cash flow needs. From those needs, we determine how much will need to be withdrawn from portfolios and structure capital reserves accordingly.
Short-term needs (0-2 years): Cash for immediate expenses, vacations, and major purchases should be readily available at the bank or in your brokerage account.
Intermediate needs (3-7 years): Short-term high-quality bonds or safe assets that can be accessed as needed while providing some growth potential.
Long-term growth (8+ years): The balance invested in diversified fixed income and equities across different sectors, sizes, and geographic regions.
We like to use cash, money market funds, CDs, and short-term high-grade bonds to fill the capital reserves portion of the allocation. They may not be exciting, but they exhibit the stability characteristics you need when markets get volatile.
Beyond Just Numbers: Peace of Mind
At PDS Planning, we understand that successful retirement planning addresses both the emotional and financial realities of long-term planning. Capital reserves provide more than financial security—they offer the psychological comfort that allows you to live comfortably without worrying about every market headline.
We believe intentional spending, aligned with your personal values and life goals, is key to achieving the ultimate return on investment—a meaningful and fulfilling life. Capital reserves make this possible by ensuring your basic needs are always covered, regardless of market conditions.
Our Approach: Personal, Pragmatic, and Transparent
Our comprehensive approach goes beyond just setting aside capital reserves. We consider the interconnectivity of your investments, tax implications, estate planning, and family dynamics, working to minimize risk while maximizing long-term wealth accumulation.
- Comprehensive — We consider all facets of your financial life, including investments, retirement income, estate planning, and tax implications.
- Client-Centered — We listen first, then design strategies around your needs, not the other way around.
- Pragmatic and Educational — We simplify complex strategies into everyday language so you can make informed decisions.
As we tell clients, “your cash flow analysis will tell us exactly how to draw your pie chart.”
Our Fees Are Simple, Straightforward, Fair
Unlike most advisors, we don’t charge a percentage of your assets. Instead, we offer a flat, fixed-dollar fee structure. You’ll always know exactly what you’re paying and why.
Why does this matter?
- You keep more of your money working for your retirement
- No hidden costs, commissions, or performance-based incentives
- As a fiduciary, our only motivation is helping you retire with confidence
Planning Ahead
As your financial planner, we believe planning should be proactive, not reactive. When markets get volatile, we don’t make impulsive decisions—we implement the plan we put in place, which includes adequate capital reserves to weather any storm.
Market corrections happen frequently and are short-term in nature, but we build financial plans and portfolios designed to last for the long term. With proper capital reserves, you can ignore short-term market noise and stay focused on your long-term goals.
Getting Started
Retirement planning isn’t just about math—it’s about your peace of mind and confidence in the road ahead. Capital reserves offer a practical, time-tested approach for protecting your short-term security while positioning your wealth for long-term growth.
At PDS Planning, our comprehensive approach and transparent fees ensure you always understand the why behind every decision. Because when it comes to your retirement, you deserve clarity, not complexity.
Getting started is as simple as having a conversation. From there, we’ll understand your goals and develop a personalized financial plan designed to help you weather any storm while building the retirement you’ve always envisioned.
IMPORTANT DISCLOSURE INFORMATION: Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by PDS Planning, Inc. [“PDS”]), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from PDS. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. PDS is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the PDS’ current written disclosure Brochure discussing our advisory services and fees is available for review upon request or at www.pdsplanning.com. Please Note: PDS does not make any representations or warranties as to the accuracy, timeliness, suitability, completeness, or relevance of any information prepared by any unaffiliated third party, whether linked to PDS’ web site or blog or incorporated herein, and takes no responsibility for any such content. All such information is provided solely for convenience purposes only and all users thereof should be guided accordingly. Please Remember: If you are a PDS client, please contact PDS, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.
