Retirement
Key points
·Have a plan to move
from saving to spending as you transition to and live in retirement.
·Following nine
fundamentals can help you create a sound, long-lasting income plan.
·Helpful information
for anyone in or approaching retirement.
So you've saved
diligently and carefully for retirement—now it's time to turn your savings into
income. The transition from saving to living off of your nest egg may seem
difficult at first, so this article will give you some fundamentals and steps
to help. By following these nine fundamentals, you'll take control of your
retirement and create a solid retirement income plan.
Of course, no single
path will fit every investor. This is especially true when shifting to living
in retirement from saving for it, when there are different sorts of challenges.
But everyone should start with a plan, and then stay flexible.
Fundamental #1: Review your situation.
Know where you are
before you decide where you're going. Determining exactly what you have is a
great place to start, no matter your situation. And you'll be well ahead of the
majority of retirees if you take the time to figure out what you've got before
making any big decisions. No matter what you've already saved, you need to take
a careful look at what you have, where you have it, and what you expect to
spend.
Do you have enough?
Based on what you have, how do you create an income plan?
Think carefully about
what you currently spend, and plan for "must haves" (what you really
need) and "nice to haves" (what you've worked hard to have so you can
live a comfortable retirement). Breaking out a budget this way, and looking at
your existing portfolio and income sources, can help you create an investment plan.
Next steps:
·Estimate monthly
and annual expensesand how much you've
earmarked for retirement.
Fundamental #2: Maintain a year of cash.
Every good plan starts
with the question, "What do I need now?" Then you can plan your
investments to keep up with your lifestyle, inflation, unexpected future
expenses or the "nice to haves" later in retirement. Set aside enough
cash to cover your spending needs, after non-portfolio income sources like a
pension, for the next 12 months.
Treat this money as
"spent." It's the first "bucket" of your cash-flow plan—a
cash reserve for your current expenditures. The second bucket will be the rest
of your portfolio.
Consider putting this
cash into a single, easily accessible place. This could be a checking account,
a money market account or a combination of accounts, maybe even short-term
certificates of deposit (CDs), depending on your personal preferences. This
money can be invested to generate a bit of return, but that's not its primary
purpose—it's there to help meet your expenses throughout the year.
Next steps:
·Examine your cash
alternatives.
·Explore cash options
for longer-term needs.
Fundamental #3: Consolidate income in a single account.
Income sources could
include a pension or other non-portfolio sources. This account should be the
first source of cash flow to support your expenditures. You may also choose to
deposit portfolio income (such as interest and dividends on stocks and bonds,
dividends paid from mutual funds or periodic future withdrawals) into this
account as well.
Your personal
preference may be to continue reinvesting those interest and dividend payments,
taking withdrawals when you need them or based on a systematic withdrawal plan.
That's okay too—some investors prefer that approach. But building more
predictable portfolio income sources to support your cash-flow needs can be a
good first line of support to your income plan. I will cover this more in
fundamental #5.
For now, depositing
any regular sources of income you rely on into an easily accessible place makes
it easier to measure your cash flow and track income and spending over time.
Next steps:
·Decide when you should
start taking Pension amount
·You want to be sure
you make the most of your Pension benefits.
Fundamental #4: Match your investments to your goals and needs.
You've already saved
to get here, so you most likely have a plan for your investments, including an
asset-allocation plan that makes sense for you. You don't necessarily need to
change that now, but it's a good time to revisit it.
Now that you've set
aside a cash cushion, you can redirect your focus back toward staying invested
for the long haul. We recommend that investors entering retirement start with a
moderate allocation—a mix of roughly 60% stocks and 40% bonds and cash
investments.
The combination of
stocks and bonds, along with an appropriate allocation to cash investments, can
help protect you against market volatility while keeping you invested for
long-term needs. Bonds provide a cushion that's generally less volatile than
stocks and provide a regular source of income. Stocks provide potential for
growth, as well as dividends that may increase over time.
If you have a shorter
time horizon or are less comfort with market risk, consider a more conservative
allocation. Unless you have large estate or bequest motives, you'll want to
adjust your allocation to be more conservative over time.
Next steps:
·Try to build your retirement
portfolio for the long term.
Fundamental #5: Cover essentials with predictable income.
Now you can start to
look at individual investments in your portfolio to put them to work for you.
Some retirees may choose to take a systematic approach to planning withdrawals
from their portfolio, whatever the source. It could be capital gains, interest
and dividends, or cash.
Others choose to build
up more predictable sources of portfolio cash flow, starting with regular
interest payments from bonds and other fixed income investments. Having these
relatively predictable sources of income can help increase confidence in an
investment plan and build a solid "baseline" of income to support
your needs.
Bonds and fixed income
investments, as well as any returns on cash investments such as money market
funds or CDs, are generally the first source of predictable income for most
portfolios. Consider dividend-paying stocks as well, either though
income-oriented stock mutual funds or individual blue-chip stocks, to add
fluctuating income sources of income that can grow. This will be part of your
allocation to stocks, based on your risk tolerance.
Stocks will be more
volatile, generally, than more conservatively invested bonds. Even blue-chip
stocks bought at a good price can be volatile, and they don't promise to pay a fixed
amount at maturity. But they can also grow to help cover discretionary expenses
and future income needs.
You may also add
annuities that pay out guaranteed income for a lump sum (immediate fixed
annuities) or that guarantee a fixed withdrawal rate on a portfolio that stays
invested (variable annuities with guaranteed living benefits) to help create
reliable cash flow.
Next steps:
·Consider what role fixed
income should play in your retirement portfolio.
Fundamental #6: Don't be afraid to tap into your principal.
Some retirees with
very large portfolios may be able to live comfortably off interest and dividend
payments spun off from predictable income sources alone. But that's difficult
to achieve unless you have a very large portfolio, especially in a
low-interest-rate environment.
Most folks will want
to tap into a portion of the money that's been saved to support their cash-flow
needs. Having a portfolio well-balanced among stocks, bonds and cash
investments, and knowing when to use those investments, can help you tap your
portfolio appropriately.
This makes you boss,
not having to rely on interest rates or market conditions. It will also help
you stay invested in an appropriate mix of investments for money that will be
needed later. The key is to have a smart way of tapping your portfolio, to keep
your investments working for you.
Next steps:
·Review income approaches.
Fundamental #7: Follow a smart portfolio drawdown strategy.
If you've created some
predictable sources of interest and dividend payments from your bond and stock
portfolio—whether invested in individual securities or funds—you've started to
lay the baseline for a tax-efficient drawdown strategy. These can be the first
source of withdrawals from your portfolio, if you haven't chosen to reinvest
them. If this is enough to support your spending needs, stop—you're done.
The next source of
withdrawals, if needed, can be principal from maturing short-term bonds, CDs or
cash investments. Consider investing two-to-four years' worth of annual
expenditures in a short-term CD, bond ladder (A bond ladder is created by
purchasing individual bonds at staggered maturities over multiple years. This
way, some bonds will always be maturing, while others invested for the longer
term generate higher income). or short-term bond funds (which are generally
less volatile than stocks, or intermediate or long-term bonds). When bonds or
CDs mature, you can tap the proceeds first, if needed, or withdraw funds from
short-term bond funds.
Next steps:
·Learn how to
essentially write your own retirement check by determining what to sell when, and from
which accounts, to generate cash for upcoming needs.
Fundamental #8: Rebalance to stay aligned with your goals.
Part of a tax-smart
drawdown strategy will likely involve regular re-balancing. You may sell
investments that have appreciated in value to generate cash. But you'll still
want to make sure you re-balance at least annually to stay in line with your
longer-term goals.
Your needs, risk
tolerance and time horizon may change as well. So now's a good time to make
sure your targeted balance between stocks, bonds and cash still makes sense for
you.
Next steps:
Fundamental #9: Stay flexible and re-evaluate as needed.
Fundamental #1 was to
review where you are currently. This process will continue throughout your retirement.
Your new life of living off your nest isn't a single point in time, where you
create a plan, set it and forget it.
You'll want to
continue to watch and revise your plan as needed. When markets are down, you
may choose to spend a little less. Or you may wish to change your balance of
stocks and bonds to decrease risk in your portfolio over time. You may also
consider annuities, which can act like a personal pension by turning a portion
of your investments into lifetime income or can help to provide a reliable,
guaranteed source of portfolio withdrawals.
If you follow these
fundamentals, stay flexible and re-evaluate annually, you'll be on the path to
a solid retirement income plan
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