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