In terms of your finances, your pre-retirement earning years focus on accumulation and growth of your money. You earn money from your job or business to pay for your current living expenses. You set some away in case of emergencies and for any needs in the future like college and retirement. Your goal is to gather as much as possible by earning it and investing it.
After retirement, you usually no longer have cash earned from your job or business to pay for your costs of living. You need safety and liquidity to ensure available funds for day-to-day costs of living along with growth to help make sure your funds last your lifetime. The growth-oriented portfolio structure of your earning years might not apply anymore, and you may have to change the way you evaluate your portfolio’ s performance.
In fact, in an effort to help reduce risk and protect principal, plenty of retirees change their asset mix to a more conservative, income-based allocation. The result is a portfolio designed to give higher rates of current income and less volatility. Specifically, your need to preserve what you have now typically outweighs your need to grow your money at a benchmark rate, although you still need enough growth to ensure inflation doesn’t lower your purchasing power during retirement.
Depending on your age, your investment tendencies may lean too far toward growth or too far toward conservative income. If you’re at the leading edge of the Boomer generation, you might have experienced years of extremely high market returns, altering your expectations for your own portfolio toward the high end.
If you are in the senior or “veteran” age group, however, you might harbor some distrust of stocks and over- confidence in bonds. Investors in this group also tend to underestimate their life expectancy, based on how long their parents lived. By overweighting your portfolio in the relative safety of fixed income and income investments, you maximize the potential of outliving your money.
A retirement distribution plan looks to find that middle ground between reduced risk and greater return, taking into regard all income streams (i.e., Social Security, wages, pensions, investment income, annuity income), assets, inflation risk, investment risk and tax exposure. Plenty of variables can come into play, so each factor needs to be evaluated based on the individual situation.
Generally, a retirement distribution model will allocate a larger group of assets to fixed income and income segments, followed by growth and income, growth, aggressive growth and most aggressive segments in progressively lesser percentages. The intended outcome is an inflation-adjusted income that lasts your lifetime by lowering emotional investment choices, maintaining purchasing power, minimizing risk, preserving principal and maintaining a fitting amount of long-term asset growth.
Establishing a retirement distribution plan can be complex and requires a thorough understanding of investment products and strategies and their associated risks. Your financial professional will help you decide the asset allocation model and products that best meet your needs.
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