Planning for your goals in retirement

Ready to start planning your retirement lifestyle? If you think you're retiring, think again. You have a new job now: making sure you manage and track your portfolio to meet your goals.

Retirement Comfort
Discuss Finances With Your Partner
Prepare To Meet With Your Advisor
Giving During Retirement

Considerations for a comfortable retirement

During your working life, you may have saved a substantial nest egg. As you approach retirement, it's important that you have a careful and effective plan to help ensure that you don't outlive your accumulated money. Remember, if you retire in your mid-60s, you could live another 20–30 years or more, which means you could still be in a long-term planning mode.

Time to re-think how you manage your assets

Until now, your strategy has probably been focused on accumulating as much money as possible. Now that you're retiring, you'll need to rethink how you manage your assets.

You may be withdrawing money from your retirement accounts, rather than accumulating, so you may need to reallocate some of your assets to investments designed to meet your short-term needs. But some of your needs are still very long-term, maybe 20 years or more, so a long-term investment approach may still be warranted.

It's not unusual for retirees to become risk averse. Without a steady income from a job, they worry that their nest egg will erode unexpectedly, and they react by seeking very low-risk investments. Before you change the overall mix of your portfolio, remember that your goal during retirement is to maintain your financial independence for your entire lifetime. This means you need to think about how longevity, the market, and inflation could impact your portfolio.

Choosing your retirement lifestyle

If you plan to continue living your current lifestyle, a general rule-of-thumb estimate may be 80% of your current expenses. This estimate, which may vary depending on individual circumstances, is based on the assumption that your cost of living will drop when you no longer have work-related expenses such as commuting costs, dry cleaning and restaurant lunches.

Many financial professionals suggest, however, that you plan to maintain 100% of your current costs, or more. Some retirees will actually need more money because they plan to travel, play extra rounds of golf or participate in other expensive recreation. Also, keep in mind the escalating costs of health care.

The choice is personal, but you'll most likely need a budget to keep from spending too much of your accumulated wealth too quickly.

If you determine that your retirement income will not support the lifestyle you have chosen, you may need to make some adjustments. Many retirees plan to supplement their retirement incomes by working part time or turning a hobby into a small business. If your nest egg appears to be a little short, the best time to find out is when you still have time to add supplemental income or even decide to work full time for an additional five years to help provide a budget cushion.

Estimating your life expectancy

Life expectancy depends on a lot of factors, including the state of your health, heredity and even luck. Taking all of this into consideration, you'll need to estimate how many years you'll need to budget for. Your goal is to maintain your financial independence, so the best approach may be planning for an exceptionally lengthy retirement.

On average, a 66-year-old retiree could probably expect to need to live on retirement savings for approximately another 18 years*. For retirees with particularly long-living relatives, a 30-year life expectancy, or even longer, could be more accurate. You'll need to make this estimate based on your personal circumstances and then budget accordingly.

Preparing for emergencies

A long bout of illness or other unexpected expenses during your retirement years could alter your planning. To prepare, some retirees consult with their insurance advisor to explore long-term care insurance or catastrophic health care coverage to help protect their accumulated wealth. Having some additional assets in an easily accessible emergency fund could provide an extra safety net. For more information about budgeting and preparing for the unexpected during your retirement, talk with your financial and insurance professionals.

*Actuarial Life Table, The Official Website of the U.S. Social Security Administration, www.ssa.gov, 4/10/2012.

Deciding how to receive your retirement plan payments

When you retire, your employer may offer a choice of how you may receive distributions from your retirement savings plan. Depending on the policies of your employer's plan—either a defined benefit pension plan or one of a variety of defined contribution plans such as a 401(k)—you may have the opportunity to choose whether you want to receive the payout in one lump sum or some form of periodic payment plan. The choices sound relatively simple, but they are deceptively complicated because there isn't a "correct" answer.

The reason the decision is so ambiguous is personal circumstances play a critical role. A periodic payment could be an excellent answer for one worker, but a lump sum payment may be the best answer for another colleague. Whatever your decision, it may influence your financial future for the rest of your life, so it's best to do some research and seek advice from a qualified professional.

Get familiar with your options

Your first step should be to learn which options are available for distributions from your employer's plan. In addition to lump sum payments, they may include your choice of annuitization arrangements, other periodic distributions, simply leaving your money in the plan, or a combination of these.

Choosing to receive regular monthly payments for the rest of your life via an annuity sounds secure, but that could be misleading. First, you need to factor in the effects of inflation. Would the annuity payment adjust for inflation? If not, the purchasing power of your monthly check could shrink over time. Over a potential 30-year retirement, your once generous check may not even cover essentials. You also need to consider that annuities come with little flexibility or liquidity to modify your income stream should your needs change over time.

Another consideration is the strength of your employer, particularly if you qualify for benefits from a pension plan. It's tough to predict if the company you work for will still be going strong in a decade, or two, or three. Yet, if you elect to accept monthly pension payments for life, you'll be depending on the health of your employer during your retirement years. If the company fails to meet its pension fund obligations, your pension could default to the Pension Benefit Guaranty Corporation, a government safety net that may not pay as much as your original pension amount.

Your own life expectancy, marital status, access to other assets and many other circumstances should be weighed before opting to take a monthly annuity payment.

Is a lump sum better? It depends.

A lump-sum payment gives you control over your money, something you may or may not be comfortable with. Ideally, you could roll your lump sum payment into an Individual Retirement Account (IRA), invest it, and expect to use the assets to generate your future cash flow stream. Unfortunately, the financial markets don't progress along consistent upward paths and expected returns are not guaranteed. You'll also, most likely, be investing a significant portion of your life savings, so your investment choices, as well as your spending choices, will be critical.

Investing for the rest of your life requires discipline and planning. And remember, in retirement, your investments may need to be aimed at providing income, not just growth.

When will you need to decide?

Every day, employees face this decision because they are offered a severance package that requires a more immediate response. Make sure you are familiar with the details of your employer's retirement plans so you can make informed decisions.

Making such a decision, at any stage in life, can be daunting, but assessment, evaluation and professional advice can help make it easier.

The information contained herein is being provided to you for educational purposes only and is not intended to constitute investment, tax or legal advice nor a recommendation or solicitation to invest in any investment product. The general information contained in this publication should not be acted upon without obtaining specific investment, legal and/or tax advice from a licensed professional.

How to discuss finances with your partner

Remove the stress of talking about money by talking about money

Have you and your spouse talked about your retirement plans lately and whether you're on track to fund them? While discussions around financial issues can sometimes be uncomfortable or a cause of stress for couples, creating a joint plan for the future is essential for a retirement lifestyle that could make both you and your spouse happy in the years to come.

Start by talking realistically about the future

Talk about what's important to each of you—your hopes and dreams for the future. Have a conversation about when you want to retire, where you want to retire and what you'll do when you retire. Will you travel around the country or the world? Will you stay in your home or move somewhere else? At what age will you retire? What hobbies or activities do you want to make a priority? Whatever the case, discuss different scenarios about what you and your spouse envision for a lifestyle after full-time employment and what it will take for each of you to feel safe and satisfied with your situation.

Work together to create a plan that's comprehensive and reasonable

Once you've decided as a couple what you want, it's time to decide the best way to fund your retirement. Chances are, one or both of you have a 401(k), IRA rollover or pension plan (if any) from a former employer. You may also have savings or other sources of potential income you've built up throughout the years, and it's important to review everything to get a clear picture of your financial situation now and what you want it to be in retirement.

You'll also want to take your entitlements to Social Security into account. Social Security benefits are usually one of the largest sources of income1 retirees accumulate. Because the benefit amount will vary depending on what age you are when you begin to claim those benefits, be thoughtful of when you'll tap this resource. Currently, if you claim at age 62, your benefit will be reduced by about 25% from what it would be if you claimed at age 66. And, if you wait until age 70 to claim, your monthly benefit could go up even more. Because benefits go up the longer you wait to claim, the higher earning spouse might want to delay claiming benefits as long as possible, since it may mean bigger checks while you're both alive and for the surviving spouse if one of you passes away.

Talk about the role investing will play in achieving your goals

As you're consolidating your various sources of income, you may discover that your combined portfolio exposes you to more risk than one or both of you may be comfortable with. You may also find that your investments overlap. Remember that investments that each of you picked in your 401(k)s, IRAs, etc., all affect your total returns. Look at the overall asset allocation of your household and make sure it leans towards what's needed to cover the lifespan of the younger spouse.

It's important to sit down together and take a look at your goals, find commonality and then work with your financial advisor to create a plan to reach them. Once you know how much money there is, you can estimate a reasonable withdrawal rate based on your projected retirement ages and how long the money needs to last. Given all the events of the past few years market ups and downs, decline in home values, layoffs, etc.—getting on the same page is even more critical to help make sure you create a lifestyle in retirement that will satisfy both of you.

How to prepare to meet with your advisor

Have an open, honest conversation with someone you can trust

Whether you've just retired or are nearing retirement, working with an advisor is an important part of planning for the lifestyle you want to maintain for the rest of your life. Your advisor acts as a neutral third party in the planning process, providing a balanced perspective and encouragement to manage your portfolio through market fluctuations.

To have a beneficial relationship, it's important that your advisor understands what's important to you. It begins by having an open, honest conversation and by your taking an active role in planning and staying on track. Below are steps you can take to prepare for a meeting with your advisor.

Gather your current income sources and assets

While your advisor may provide you with a specific checklist, in general it's a good idea to bring the following items to your meeting:

A list of the source and amount of your assets, as well as a list of debts
Recent statements from your tax-deferred investments, like 401(k), IRAs, as well as other investments or other financial products
Your most recent Social Security statement
Any insurance policies you hold
Recent tax returns
Details of your current or expected employee benefits, in particular, any pension or retirement plan information

Be ready to discuss your spending goals

Be honest and realistic about the goals you have for the lifestyle you want to live in retirement. What do you envision for your future—will you travel the country or the world? Take up a new hobby or attend classes? Stay in your home or move somewhere new? What philanthropic endeavors do you want to pursue? Do you plan to leave assets to family members or others?

Whatever your goals, a clear picture of what you want will help your advisor design an investment portfolio built to generate enough income to fund your spending goals.

Get answers to three key questions

How much do I need to spend each month to live the lifestyle I desire?
Will my money last?
What can I do to be sure I stay on track?

In turn, answer your advisor's questions fully and honestly. With a comprehensive understanding of your goals and what you hope to achieve, your advisor can work with you to create a plan for income in your retirement that will provide for the lifestyle you desire.

Partner with your financial advisor

Planning your lifestyle in retirement starts with an open and honest conversation with someone you trust. Your financial advisor can help you navigate the challenges and opportunities you'll face as you venture into this new and exciting time of your life.

With our annual Value of an Advisor Study, we demonstrate that a financial advisor relationship may be one of your best investments.

Get the full study

How to keep on giving during retirement

Don't stop giving just because you're retired

As you're planning for retirement, there are all sorts of things to take into account when developing your plan for the lifestyle you want to live. Among the many considerations, you may have a favorite charity—or charities—you take pride in donating money to on a regular basis. You enjoy helping causes that are near and dear to your heart and may want to continue this pattern of giving throughout your retirement.

Be clear about your priorities

When thinking about sustaining such philanthropic endeavors, it's important to thoughtfully consider your options prior to committing to another, albeit altruistic, expense. Before you make any financial commitments to charity, you must first take a look at your financial picture and determine how it fits within your overall priorities and whether or not this is affordable within your long-term plan.

If you find yourself faced with the possibility of financially coming up short, it may make more sense to scale back or eliminate your monetary donations. You could derive similar satisfaction from getting out and contributing your time and energy to help your community without negatively impacting your financial situation. In fact, once you retire you may have more time available to dedicate to favorite causes than you had when you were working full time.

Take time to do it right

On the other hand, if you are in a position to make a financial contribution to charity, here are some things to consider:

If you can estimate the amount you're comfortable donating and determine the frequency of your giving, you could work with your advisor to make this an ongoing part of your spending plan.
Decide who you want to donate your money to and be sure to do your research. Whether it's an organization you have established ties with or a new cause, you'll want to make sure their vision aligns with your intentions. CharityNavigator, an independent charity evaluator, provides free financial evaluations of America's charities and useful details about their efficiencies and the potential usage of your contribution.
Talk with your advisor and/or tax professional about the potential tax benefit of donating, whether it's time or money. If you're looking to maximize the benefit of charitable giving, it's important to familiarize yourself with the rules around deductibility and specific paperwork you'll need to document any claims.

Manage large gifts carefully

Morningstar.com provides "10 Tips for Charitable Giving During Retirement," including two possible ideas for you to consider if you are looking to make significantly large charitable gifts:

Use required minimum distributions from your IRA. If you don't need these distributions when you're required to take them, you can contribute up to $100,000 directly into your charity of choice. You also have the option to name a charity as an IRA beneficiary, just as you would your spouse or child. In either situation, be sure to consult a professional about the potential tax implications.
Consider establishing a trust or participating in donor-advised funds. Donor—advised funds allow you to undertake a more formal giving program, whereas a trust might work well for significantly larger charitable gifts. In either case, it is even more critical to seek the advice of an expert.

Consult with your financial advisor and keep them informed

Make sure your advisor understands that charitable giving is important to you and an important part of the lifestyle you want in retirement. Since opportunities to contribute to charity arise when you least expect it, like Hurricane Katrina, be sure to keep your financial advisor informed of the unplanned, as well as your planned, giving.