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| Organizing Your Transition to Retirement |
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You've dreamed of trading in a daily work regimen for the freedom of retirement. You've planned, saved, and accumulated a nest egg for this next phase of your life. Now that you're facing retirement, what should you do with your money? There's no shortage of retirement planning guides, but when you need guidance on how to best utilize your assets during retirement, advice is hard to come by. Here are some useful steps to get you started, helping you to cut through the clutter and begin the process in an organized, informed, and confident way.
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Envision Your Retirement
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A little advance planning may help you smooth the transition into retirement. Consider: How will you spend your days? Work part-time? Volunteer? Travel? Relax? What are your lifestyle/activity plans? Are your plans complementary with the plans of your spouse/partner? Can you afford the lifestyle that you seek? Do you agree on how money will be spent? Do you feel confident in your ability to make your money last?
Put Your Vision and Concerns on Paper
There are so many variables to consider that planning may seem overwhelming. Putting initial plans and concerns on paper can help clear the cobwebs and improve your focus. We've provided handy worksheets that help define:
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Your lifestyle in retirement. |
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Retirement issues that concern you. |
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Your expected sources of income in retirement. |
Share Your Vision with Your Financial Advisor
Your completed worksheets may give your financial advisor valuable insights into what is important to you. He or she will assess your total financial picture and help set realistic expectations about your income and expenses, in light of your lifestyle plans and concerns. Then, you'll work together to modify your portfolio allocation to support your goals. But first, your financial advisor will need to gather data from you. MainStay's RetirementFolio Checklist is a separate tool that can help you collect the documents your financial advisor needs to create an effective retirement income plan. Simply check off each item you have, tuck the documents in the checklist, and supply them to your financial advisor, who can photocopy and return originals to you.
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Take a Closer Look at Your Budget
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At retirement, you may stop receiving a regular paycheck and begin paying your expenses from an account funded by cash inflows (pension, social security, etc.) and/or the proceeds of assets that you sell. You'll want to proactively manage your assets and liabilities and your spending habits (budget) simultaneously to ensure that you don't run out of money. You should seek advice from your financial advisor and/or other advisors to understand your options in managing this balancing process effectively.
MainStay's Personal Cash Flow Statement can be used by your financial advisor to list your (and your spouse's/partner's) cash inflows, your basic expenses, and discretionary expenses. If the bottom line of your Cash Flow Statement (cash inflows minus cash outflows) is a negative number, you'll want to develop a strategy with your financial advisor to handle the discrepancy (see Evaluate Your Options). Monitoring your cash flow is important throughout retirement because your needs and expenses may change over time.
Organize Your Retirement Assets and Liabilities
You may have accounts with multiple institutions. Here are some tips to help you organize your retirement assets and liabilities.
Write it all down with MainStay's Personal Balance Sheet—your financial advisor can assist you to list all your various assets and liabilities in one place. Similar to the way a company actively manages assets and liabilities, your Personal Balance Sheet (and Cash Flow Statement) is a powerful tool in managing your finances in retirement.
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Consolidate your assets—Maintaining accounts with different institutions is often costly and cumbersome. You may save money and simplify your life by consolidating all accounts with one financial advisor. Also, having the assets in one place simplifies the process of settling your estate. One day, your heirs and/or executor (person named in the Will to manage your estate) will be grateful that you made a difficult chore easier to complete. |
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Review account types—You may have a number of different account types, such as bank accounts, 401(k)s, IRAs, annuities, pension plans, taxable investment accounts, etc. Your financial advisor and accountant can help determine which assets should be liquidated at any point in time, since tax consequences vary by asset and account type. Also, for some types of accounts (e.g., IRAs and 401(k)s), you're required to take minimum distributions after age 70 1/2 . You'll need to plan to meet these requirements. |
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Understanding Retirement Traps and Risks
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It's important that you understand retirement traps and risks. Most retirees focus on financial risks when working with their advisors.1 However, you should consider all risks that could significantly impact your retirement lifestyle:
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Timing of Returns—Early losses in retirement can undermine long-term planning. The impact of taking withdrawals during a bear market can have irreversible effects on the longevity of your assets. Conversely, beginning your retirement during a bull market can help offset withdrawal amounts simply because investments will rise given favorable market conditions. |
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Rate and Nature of Withdrawals—If you withdraw too much too soon, you run the risk of running out of assets long term. A 1% difference in withdrawal rate can have a huge impact on how quickly the assets are depleted. Liquidating assets in a tax-efficient way can preserve them a bit longer because you generally pay lower taxes on transactions resulting in capital gains than ordinary income. You need to balance such choices with the need for an allocation to equities to provide growth potential for certain assets. |
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Longevity—A 65 year old male has a 75% probability of living to age 78, and a 50% and 25% likelihood of living to age 85 and 91, respectively. Furthermore, at least one spouse in a married couple has a 25% chance of living to age 96.2 If you only plan financially to cover your average life expectancy, you could ultimately outlive your assets. You can reduce this risk by overestimating your life expectancy. |
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Inflation—Rising consumer prices will erode both your purchasing power and the return on your investments. Because of this, it's important to consider cost-of-living increase options/riders on existing annuities or life insurance policies. |
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Health Care Costs—Health care costs are high and are rising faster than other costs. Research has shown that three out of four retirees are concerned about paying health care expenses not covered by Medicare/Medicaid.3 In addition, employer-provided medical benefits for pre-retirees and retirees have been steadily decreasing over the past decade.4 In light of these trends, you should be prepared to set aside sufficient resources to pay for the rising cost of medical care and prescription drugs. |
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Asset Allocation—Asset allocation strategies in retirement differ from those you might have used while accumulating assets. Portfolio volatility becomes a greater concern due to the impact of withdrawals. Typically, you'll want to optimize income to pay for your expenses, while providing growth potential to hedge against inflation longer term. As you see in the hypothetical chart to the left, cash inflows such as social security, pension payments, and guaranteed product payments could be thought of as supporting your basic needs, whereas the managed portion of your portfolio could support a smaller segment of basic expenses, and the lion's share of your discretionary expenses invested in 3-5 year periods. Naturally, this chart is offered to illustrate the point and not to recommend a specific allocation, which you should discuss with your financial advisor. |
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Evaluate Your Options and Make a Plan
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Some pundits say that you need 70—80% of your current income to maintain your lifestyle during retirement. This may not be true for you—one size does not fit all. Your income needs may be much lower or could be 100% of what you earned before you retired! So, how do you figure out the ideal amount of your retirement "paycheck?" As we described earlier, you need to analyze your monthly expenses and compare the total to your guaranteed monthly cash inflows. Next, you need to weigh your options. While not comprehensive, the following are some of the options you might consider in discussions with your financial advisor:
If your guaranteed cash inflow is sufficient to pay basic expenses, you may want to:
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Set up a Systematic Withdrawal Plan (SWP) from investments to receive a fixed sum on a periodic basis, while you maintain the remainder of your portfolio. Be aware that the value of your investment will change as markets fluctuate. This will provide cash for discretionary spending. |
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Invest conservatively (diversified mix of fixed income, equities, and cash), then continue to monitor your asset allocation. After the first 7—10 years of retirement, you may actually be able to increase your risk profile. |
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Collect dividends from your retirement assets to help pay for discretionary expenses. |
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Create an emergency fund to help cover unexpected, substantial expenses and reduce the need to access shorter-term investments. |
If your guaranteed cash inflows do not cover your basic expenses, you may want to:
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Reduce discretionary spending. Though not always easy, it's imperative to budget and cut discretionary spending as needed when living on a fixed income. |
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Take distributions from your retirement plan assets to meet basic expenses. |
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Consider a SWP to provide long-term income, as well as maintain an investment portfolio to provide potential investment growth as described above. |
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Consider setting up a guaranteed source of income to help you budget. Just as you relied on regular paychecks while working, a guaranteed source of income creates a financial "floor" that you can count on to cover your fixed expenses. |
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Either maintain a conservative investment allocation or increase your risk profile and periodically reassess your portfolio's asset allocation and balance. Speak to your financial advisor about your risk tolerance and portfolio allocations. |
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Consolidate accounts, wherever appropriate, to reduce annual expenses. |
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Start an emergency fund using dividends collected from your retirement assets. |
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Obtain The Professional Advice You Need
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For many people, retirement plan assets represent the largest portion of their nest egg. Regardless of how much money you've accumulated, exactly how you manage your assets while retired could seriously affect your long-term financial security. While you could make your own decisions about how to deploy your retirement savings, with so much at stake, it's wise to seek the advice of a financial advisor.
Reassess Your Plan, At Least Annually
Meet with your financial advisor annually to monitor your investments and rebalance or reallocate your portfolio as your needs change. With so many variables involved in retirement asset planning, you'll want to keep a close eye on your portfolio to spot any potential problems early. One way to become more comfortable might be to conduct reviews every six months for the first two years of retirement, then cut back to once a year going forward.
Retirement Lifestyles, Concerns, and Income Sources Worksheet
Here is an easy way to get organized and create a personal game plan of items to resolve. The worksheet below is designed to help you to record your thoughts about retirement. Check all items that apply to you, note that an item is either resolved or unresolved, then comment on what you feel needs to be done next. Some items relate to long-term decisions you need to make, whereas others may require immediate, eventual, and/or ongoing action on your part. If you are married, please be sure to have your spouse fill out his or her own worksheets and compare notes. Be sure to share these worksheets with your financial advisor.
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Retirement Lifestyles, Concerns, and Income Sources Worksheet
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Here is an easy way to get organized and create a personal game plan of items to resolve. The worksheet below is designed to help you to record your thoughts about retirement. Check all items that apply to you, note that an item is either resolved or unresolved, then comment on what you feel needs to be done next. Some items relate to long-term decisions you need to make, whereas others may require immediate, eventual, and/or ongoing action on your part. If you are married, please be sure to have your spouse fill out his or her own worksheets and compare notes. Be sure to share these worksheets with your financial advisor.
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The preceding information has been provided for informational purposes only. Neither New York Life Investment Management nor its representatives provide legal, tax, or accounting advice. Please contact your own advisors.
Securities are distributed by NYLIFE Distributors LLC, 169 Lackawanna Avenue, Parsippany, New Jersey 07054.
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