Retirement Planning

Developed by author and financial guru Dave Vick, the ABC Planning process recognizes that, for planning purposes, all money is not the same. Once you learn to identify the different kinds of money, and what you want each kind of money to do for you, you can derive a financial plan that works and lets you sleep at night.

In ABC Planning, you identify your three types of money: Yellow, which is your liquid money for emergencies, expenses, and anything else that might come up. This money protects your green and your red but has little if any growth potential. This money is held in CDs, money markets, savings, checking, etc.

Your red money is your money at risk. This money has potentially higher growth potential, but also has the potential for significant losses. Although it may seem liquid, if it is significantly down when you need it, you could take severe losses in accessing your money. This is the money you have invested in stocks, mutual funds, real estate, precious metals, and other commodities, bonds (in 2008 bonds were down as much as 30%!), and anything else that can lose money.

Your green money is your protected growth money. This money has potentially higher returns than the yellow money but guarantees the safety of the principal. In addition, it retains your gains and provides guaranteed income. This money offers up to 10% per year in liquidity during the growth phase, and up to 10% guaranteed growth for purposes of guaranteed lifetime income.

ABC Planning recognizes that we have two very different phases in our financial lives. The first – the accumulation phase – is the one everyone is familiar with. The second is much more perilous financially: the spending or decumulation phase. Unfortunately, most planners and their clients don’t recognize the differences and people get stuck in accumulation mode in their financial planning strategies. This can be deadly if you are in your spending phase of life.

Here is an example of why this is so important. When people are in the accumulation phase of their lives, planners coach them to rely on a technique called “dollar cost averaging” in order to accelerate the benefits of investing.

By adding a steady amount of money on regular intervals over time – say every month – they are able to leverage the different prices of stocks or mutual funds in their favor. More often than not, if markets are increasing over time, the cumulative price of the securities they purchase will be greater than the individual price of the shares purchased.

However, what you usually won’t hear from your planner is that this very same dollar-cost averaging can also increase market losses while in the spending phase. To see how this problem can decimate a plan, watch the video above.