Most of us work hard all our lives to get to the endgame of retirement. But retirement isn’t the endgame any more, as if it ever was. Retirement is just the beginning of another stage of life.
With most retirements often lasting 25 or 30 years nowadays, financial experts are telling people to think of it in four phases, much like a road trip.
Retirement shouldn’t be a single goal of money alone. Think about what you want your retirement to be. Do you plan to work a little? Volunteer? Travel? Devote yourself to a new pursuit?
Wherever your retirement ends up, you should start planning for it now by taking a good hard look at your current expenses, both a) fixed – mortgage, utilities, car payments; and b) variable – food, travel & health care. Then make changes based on your expected income and expenditures in retirement.
Remember to include quarterly and annual expenses like property taxes, club memberships and association fees. New retirees often find they initially spend about as much as they did when they were working, yet eventually many expenses trail off.
Once you understand your expenses, you’ll need to map out a plan to meet those income requirements. Think of this in three buckets:
Most people find the early years of retirement fairly active—some travel or start a business, or take part in other pastimes that can be costly. All that can add up to higher variable expenses, which means you’ll need more cash to pay for them.
If your income bucket isn’t producing enough, you could consider converting some long-term assets from the investment bucket into income-producing vehicles such as bonds, dividend-paying stocks and immediate or guaranteed income annuities. Best bet to convert: more aggressive stocks or mutual funds, as you’ll want to make your portfolio more conservative as you age.
What you choose to convert to depends on both risk tolerance and need—if you’re conservative, better to go with safer choices like bonds or annuities. If you’re comfortable with more risk—consider dividend-producing stocks.
But the decision to sell stock to fund your golf game shouldn’t be made lightly. You should tap your investment bucket as little as possible, so plan appropriately.
One key factor in this planning is taxes. Traditionally, people just think about asset diversification, but tax-deferred accounts like IRAs, 401(k) plans and many annuities should take advantage of your tax situation and Social Security benefits.
The trip isn’t over but your speed isn’t quite what it once was. Your trips around the world have become visits to the grandchildren; you’ve passed on your business and are settling down.
Although ongoing expenses may be less than in earlier years of retirement, inflation has reduced your income’s purchasing power. Even if, as most economists predict, inflation won’t go much beyond today’s 2% to 3% a year, that can still hurt: $400,000 in current savings will require $487,000 in 10 years’ time to have the same purchasing power.
If you haven’t been keeping a close eye on your portfolio, this is a good time for a checkup. If your income-producing vehicles are coming up short, think about switching over more of your long-term assets. Again, take only what you’ll need. Overall, roughly 60% to 70% of your assets should be in the income bucket by this stage.
The active phase of your retirement is pretty much done with. Now, your goals are to make certain you’re comfortable while looking to make your assets last as long as necessary. This slice of retirement will likely include more doctors’ visits, prescription costs and other medical expenses than your earlier years. That makes security job one.
At this point, most retirees’ assets are in cash or ultra-safe securities like government bonds that offer both income and security. If you’re also planning your estate, you may want to consider keeping some money in a mix of high-quality bonds or blue-chip stocks that pay dividends to leave to your heirs.
Where to live will be a central issue. Congratulations if your health allows you to continue to live independently. Whether you stay where you are or move, you’re probably going to have to pay a substantial sum out of pocket for whatever care you require, which will mean a greater strain on your income bucket.
That illustrates the importance of planning for retirement for the long haul. Knowing what your and your family’s goals are is important, not just five years from now, but 20 and even 30 years from now.
For more information contact us at 845.563.0537 or Contact@CompassAMG.com
The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm. Securities offered through an affilliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.
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