Funding Your Golden Years: Retirement Planning Steps to Consider Early
For all investors, there comes a time when the fruits of their labor need to start working for them – that pivotal point when lifelong accumulators need to begin drawing upon their investments to pay themselves back in retirement. Making that emotional and practical shift from being an accumulator of assets to what's known as a "decumulator," meaning you're drawing down those savings, can be stressful, particularly at a time when markets are volatile and income sources are scarce. Planning early for retirement can make all the difference.
Step 1 to Consider: Assess Your Retirement Needs
- Identify your retirement goals. The first step in determining how much income you will need in retirement is to pinpoint your goals.
- Itemize your anticipated expenses. Once you determine what you want to do in retirement, you can begin estimating the income required to fund those ambitions. The Retirement Expense Worksheet can help.
- Inventory existing income sources. Take stock of the income sources you have now or anticipate having in retirement (e.g., full- or part-time employment, Social Security, pensions, annuities).
- Identify investment assets. These may include company retirement plans, individual retirement accounts (IRAs), taxable investments, deferred annuities, real estate and cash-value life insurance.
Step 2 to Consider: Mind (and Close) the Retirement Income Gap
For many pre-retirees, anticipated annual expenses may be higher than expected annual retirement income. That gap can often be closed through a well-considered plan to withdraw from your investment portfolio. Keep these important considerations in mind:
- Choose your rate wisely. A higher annual withdrawal rate can shrink your years of retirement income.
- Know that things will change. Your income needs may change over the course of your retirement. A plan that works at age 65 may not work at 85. Plan to revisit your investment strategy.
- Mix it up. Combining different withdrawal strategies (e.g., fixed, inflation-adjusted) to target specific needs can make sense. The assets supporting each income requirement are invested according to that need.
- Beware dollar cost "ravaging." The concept of dollar cost averaging, which works well when accumulating assets, works in reverse when decumulating. If you're taking out a fixed dollar amount on a monthly basis, you're selling fewer shares when prices are high and more shares when prices are low. Consider taking income from bond coupons and stock dividends instead of selling shares outright.
Work with your financial planner to establish a retirement income plan suited to your needs.