Smart planning can help you enjoy your life’s work long after you retire.

  • As your retirement years loom, it’s important to plan so that you’ll have the income you need to sustain your lifestyle.
  • It may also be important to continue growing your assets to create additional security or to leave a legacy.
  • Setting realistic targets for investment returns is critical, since they represent an important offset to anticipated cash flow needs during retirement.  

The time has arrived when you are about to retire or transition your business, bringing a reliable source of income to an end.  Do you have adequate sources of funds available to replace that income so that you can maintain your current lifestyle?  This is a common planning question among the millions of Americans approaching retirement, regardless of age or overall net worth. Solving the equation for the long term can be a job in itself. 

If you’re part of the baby boomer generation, your retirement income equation likely looks very different than it did for your parents. Your planning time horizon may be twice as long as that of your parents, perhaps even stretching beyond 25 years. And, unlike your parent’s generation, stable income sources such as Social Security and pensions may only satisfy a small fraction of your retirement income needs. As a result, the more critical component of planning for a comfortable retirement is the accumulation of assets during your working years. For the average worker, this is commonly achieved through savings, investments, and contributions to qualified retirement plans. If you’re a business owner, your retirement nest egg may be entirely tied up in the business. In this case, you may be required to realize a liquidity event (i.e., sale) in an amount that provides adequate net proceeds to fund your retirement income needs.

Effective portfolio management is key
For the decades leading up to retirement, most investment decisions are focused around accumulation. However, once you arrive at the employment finish line, this focus changes significantly. Distributions from your investment portfolio are now most important, and hinge on the effective management of your assets in light of your goals.

Your portfolio must be able to provide an adequate cash flow stream, now and in the future, that is managed to your individual needs and goals and your appetite for risk. In addition, you may be looking for some level of continued growth to either create additional security or to leave a legacy. There is no ‘one size fits all’ to investing assets in retirement; it depends on your unique situation and parameters.

When looking at risk, determining the level of risk you are comfortable with is one of the most important investment decisions you will make. More risk often equals more return over time, but it becomes increasingly important to select an appropriate risk strategy and asset allocation, particularly as you near your retirement years. Once selected, it is preferable to stay with the investment strategy you are comfortable with; frequent movement between strategies is not ideal.

In looking at the timeframe of your portfolio, understand that longer time horizons allow riskier portfolios the ability to recover after periods of downside volatility. Diversification also remains a key component of investing, especially during retirement.

Economic considerations
The current economic environment creates several challenges to this mission. Lower economic growth rates, low interest rates, and a prolonged U.S. equity bull market have created the possibility of future diminished returns. As such, interest and dividends may become a larger part of total return for both stocks and bonds. The U.S. economy may still be dominant, but it is further along in its economic cycle and there is the potential for long-term deceleration in relation to other world markets. To tackle these two challenges, you must identify quality income solutions and evaluate global investing opportunities. To combat the destructive forces of inflation, you should consider tools such as inflation linked bonds and other purchasing power protectors.

Setting realistic targets for investment returns is critical, since they represent an important factor when considering anticipated cash flow needs during retirement.

Shifting spending patterns
It is also critical to be realistic when identifying cash flow and income needs during retirement, understanding that spending patterns can shift as you age. Leisure and discretionary spending may decrease while healthcare expenditures may increase. As living expenses and cash flow needs shift, the best asset source from which you draw from may also change. As a result, your tax landscape may change as well. It is important to anticipate and plan for these changes by revisiting spending patterns periodically and identifying the optimal funding strategy to fulfill each need.

For example, early in retirement you may fund your lifestyle using resources from a taxable investment account. Later in retirement you may be relying on a tax-advantaged Health Savings Account to pay for increased healthcare expenditures. You may also be drawing more of your cash flow need from a qualified retirement account since distributions are required to begin at age 70½. The withdrawals from the Health Savings Account would not be subject to income taxes if used for qualified healthcare expenses; however, your required minimum distributions from your qualified retirement accounts would be subject to ordinary income tax. Your tax professional and financial advisor can assist in planning for changes and structure an investment and withdrawal strategy to meet your changing needs.

If properly executed, a detailed approach to planning and investing can result in a longer time horizon for your financial resources during retirement. The proper allocation across asset classes and attention to taxable versus tax-free investments can be powerful. In addition to portfolio design, developing effective withdrawal strategies that consider the tax treatment of each asset source can create additional opportunities. Tax professionals and financial advisors who consider these factors in planning and work together to advise investors can be the differentiator in helping you best achieve your retirement income and legacy goals. 

This article is for informational purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or as a determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on their objectives, financial situations, and
particular needs. This article is not designed or intended to provide financial, tax, legal, accounting, investment, or other professional advice since such advice always requires consideration of individual circumstances. If professional advice is needed, the services of a professional advisor should be sought.

Diversification does not ensure a profit or guarantee against a loss. There is no assurance that any investment strategy will succeed. Past performance is no guarantee of future results.

IRS Circular 230 disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that, while this publication is not intended to provide tax advice, in the event that any information contained in this publication is construed to be tax advice, the information was not intended or written to be used, and cannot be used, for the purpose of (i)
avoiding tax related penalties under the Internal Revenue Code or (ii) promoting, marketing, or recommending to another party any matters addressed herein.

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