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Building Your Retirement Roadmap


Careful planning may give you a better chance of living the retirement you want. By setting clear, well-informed goals, you stand a better chance of retiring on your own terms.

Many today may see retirement not as a set date on the calendar, but as a gradual transition to a new chapter in life. Today’s retirees may continue to work part-time, but with an increasing focus on leisure activities, volunteering and time spent with family and friends. Regardless of how you view retirement, the same truth holds:

The more time you take to prepare for the future, the more likely it is that you will achieve your personal vision.

Having a well-thought-out plan provides advantages not only in the future, but also now in terms of increased confidence and an improved sense of well-being. As with any financial plan, the sooner you begin, the more time you’ll have to make progress toward your goals. 

Potential considerations for retirement planning:

  • Setting specific goals informed by your unique financial and personal circumstances
  • Preparing for the risks that confront retirement assets1
  • Creating a plan to minimize taxes in each stage of your journey
  • Monitoring your plan regularly, making adjustments as needed to stay on track

The Power of a Plan

Would you set out for vacation without knowing where you want to go?

Consider this scenario: You’ve blocked out time on your calendar for a getaway. You’ve planned where you want to go, how to get there, what you’ll do and how much it’ll cost. Without careful planning, you’d stand little chance of realizing your vacation dream. Yet that’s exactly the approach many people take with retirement. They may save, but without a clear understanding of where they want to go and whether they’re on track to getting there.

6 Threats to Your Nest Egg

Your retirement savings are exposed to different kinds of retirement risk.1 From an investing standpoint, risks to consider include:

  1. Longevity Risk – By good fortune, you live a long life, but run out of resources.
  2. Inflation Risk – Reduced purchasing power lowers your standard of living. 
  3. Interest Rate Risk – Changing rates may negatively impact the value of your investments. 
  4. Market Risk – Financial losses—especially just before and after starting retirement—put a dent in your savings, impacting your lifestyle. 
  5. Excess Withdrawal Risk – Your spending depletes your investment portfolio prematurely. 
  6. Long-Term Care Risk – The need for health-related long-term care drains your resources.

The good news is that these risks may be reduced or even eliminated through careful planning. Ask your financial advisor about ways to address the specific risks surrounding retirement.

Being Proactive Pays

Research shows that investors who take time to plan for retirement feel more prepared and confident about the future, typically save more and experience better outcomes.2 In the pages ahead, we’ll take a look at key considerations for the three stages of retirement, outlining the steps you should take in each, as well as pitfalls to avoid.

Choosing Advice/Guidance?

Think about a Human

Creating a retirement plan based on your unique circumstances and lifestyle goals is a complex process. Unlike digital alternatives, a human advisor offers the ability to see you as a whole person. That means factoring in aspects of your life that should affect your financial plan, such as your family relationships, your short- and long-term aspirations and your concerns and hopes for the future.

Your human advisor can:

  1. Map a more thorough, accurate range of possible outcomes for your financial situation in retirement using specialized software that accounts for a wider range of factors than you’ll find using online options.
  2. Coach you through life changes like divorce, inheritance and career moves.
  3. Suggest strategies to manage risks that may threaten your portfolio. 
  4. Develop a holistic financial plan that provides for both the quantitative and qualitative insights into your individual circumstances and simulates potential outcomes. 
  5. Find opportunities for tax savings that go well beyond the basics.
  6. Prepare your portfolio for market downturns. Studies have shown that most investors make the wrong investment decisions during times of market turmoil.3 Your advisor can help you plan for the possibility of a down market, and will stand ready to coach you through it.

Stage 1: Preparing for Retirement

If you are reading this, chances are good that you recognize the importance of putting money away for retirement. But did you know that how you save is just as critical to your future?

How much is enough?

In the years leading up to retirement, your goal is to accumulate wealth to support your lifestyle when you’re either working less or not at all. While saving on its own is a great start, having a clear goal to aim for can strengthen your resolve and give you greater confidence in the future. Simple online calculators can provide a ballpark estimate of how much you will need to save. Better yet, your financial advisor has the tools and experience needed to fine-tune your savings target, making you more likely to achieve the outcome you are hoping for.

Making the Most of Tax-Advantaged Accounts

A powerful way to grow your savings is through IRAs, 401(k)s and other employer-sponsored plans that allow income earned on assets held within the account to grow tax deferred. When tax-deferred earnings are compounded over time, it’s an advantage that really adds up.

  1. IRAs and Roth IRAs: Contributions to a traditional IRA generally reduce your current taxable income; whereas contributions to a Roth IRA do not. Both offer the power of tax-deferred compounding with respect to income earned on assets held within the account. Which type of account is best for you depends on your tax brackets now and in retirement. Your advisor can help you choose.
  2. Employer-sponsored plans like 401(k), 403(b) or 457(b) plans: Consider maximizing your contributions in order to take full advantage of tax-deferred compounded earning growth. If your employer offers to match your contributions, that’s an added incentive. 
  3. Health Savings Accounts (HSAs): An HSA is a tax-exempt trust or custodial account you set up with a qualified HSA trustee to pay or reimburse certain medical expenses you incur. HSAs are designed to help with high-deductible healthcare costs and are also another way to grow your money tax deferred.

Time: Your Most Powerful Tool for Growth

Time really is money. The sooner you start, the more you will benefit from compounding. In addition to investment growth, compounding offers the added boot of reinvested interest and/or dividends over time. You will get even more out of compounding in tax-advantaged accounts like IRAs and 401(k)s. The chart below shows how compounding can add significantly to your savings over time.

Going Deeper: Compounded Growth

The sooner you start saving, the more you stand to gain

Stage 1: Potential Pitfalls to Avoid

  1. Saving without the advantage of clear goals.
  2. Not investing aggressively enough when your time horizon is longer.
  3. Delaying your saving, so not getting the most out of compounded growth.

Stage 2: Transitioning to Retirement

You have built a nest egg. Now what?

The risk to your retirement savings will likely never be greater than in the five to ten years before you transition to retirement. That’s because you no longer have the benefit of time to make up for any market downturns you may experience.

Reducing Risk

With this in mind, as you approach retirement, you may consider gradually repositioning your savings for protection of principal. That means changing your portfolio’s asset allocation to reduce risk so you would be less affected by a market downturn.

Going Deeper: Watch your beta

One potential way to reduce risk is to check the beta of your investments. Beta measures how an investment has responded to volatility in the overall market. Funds with a beta of 1.0 tend to move in tandem with the stock market, whereas funds with a beta of 0.5 are likely to move with half of the market’s volatility. If you are close to retirement, consider looking for mutual funds with lower betas. Other measurements, such as a fund’s standard deviation and Sharpe ratio, can give you a more complete picture of your risk. Your financial advisor can help you decide how much risk is appropriate for your portfolio.

Creating Streams of Income

In addition to reducing risk, you’ll want to find ways to create sustainable, diversified income streams to support your spending in retirement. Your strategy might include investing in bond funds, dividend-paying stock funds, or other lower-risk, income-focused investments. For most of this century, retirees have faced the challenge of finding income in a low interest rate environment. While it may be tempting to choose investments with above-market yields, keep in mind that these often come with elevated risk levels that may not be suitable for retirement assets.

Waiting to Tap Social Security

If you expect to live a long life, it’s better to wait to start your Social Security benefits. Social Security is like an annuity with a growing lifetime payment that’s adjusted for inflation. Because of these advantages, it often makes sense to preserve your Social Security until your full eligibility age, when you can enjoy the full benefit of the program. The table below shows the percentage of payments you would give up by starting payments at an earlier age.

With Social Security, Waiting is Often Better

If you are born between 1943 and 1954 and start benefits at:

Going Deeper: Sequence of returns risk

Sequence of returns risk poses one of the greatest threats to your retirement. It refers to the risk that a market downturn in the years just prior to or just after you retire depletes your portfolio at the very time when you are starting withdrawals. In this situation, your portfolio takes a hit not only from falling asset values, but also from withdrawals, and is unable to recover. According to one research firm, “Negative returns in the first few years of retirement can significantly add to the possibility of portfolio ruin.”5 Sequence of returns risk may be reduced by shifting assets to lower-volatility investments, and by managing downside risk through alternative investments that include hedging strategies. 

Stage 2: Potential Pitfalls to Avoid

  • Taking on too much market risk in the years leading up to your retirement. 
  • Starting Social Security benefits early. 
  • Not planning for tax efficiency as you reposition your portfolio for lower risk.
Taking on too much market risk in the years leading up to your retirement. X Starting Social Security benefits early. X Not planning for tax efficiency as you reposition your portfolio for lower risk.Taking on too much market risk in the years leading up to your retirement. X Starting Social Security benefits early. X Not planning for tax efficiency as you reposition your portfolio for lower risk.

Stage 3: Living in Retirement

With your Stage 2 planning in place, you are ready to start a new chapter in life. Of the financial decisions that remain, two of the most important involve determining how much to withdraw to support your living expenses and which of your accounts to tap first.

Creating a Drawdown Strategy

In terms of deciding how much to withdraw, your financial advisor is your best resource. Simplified strategies based on fixed dollar amounts or fixed percentages of assets may work for some, but don’t account for personal circumstances and market-related factors that could impact the sustainability of your portfolio. When it comes to deciding which sources to draw on first, your goal may be to minimize taxes by choosing the optimal combination of tax-deferred or other tax-advantaged accounts and taxable accounts. The following is an example of a hypothetical drawdown strategy:

Sample Drawdown Strategy

  1. If over the age of 70½, first take required minimum distributions (RMDs) from your traditional IRA and/or employer-sponsored plan (for example, 401(k)). Doing this will enable you to avoid a sizable excise tax penalty of 50%.
  2. Tap taxable accounts next. This way, you give your tax-advantaged accounts more time to potentially benefit from compounded tax-deferred earnings growth. Keep in mind that selling taxable investments may result in capital gains tax on appreciated assets. Consider liquidating high-cost-basis investments first.
  3. Liquidate traditional IRA and employer-sponsored plans next. You’ll need to pay ordinary income tax on your withdrawals. Be aware that withdrawals beyond a certain point may bump you into a higher tax bracket.
  4. Spend Roth IRA and Roth 401(k) assets last. Qualified withdrawals from these accounts are tax-free. In addition, assets in Roth accounts can be left to heirs, who will not have to pay taxes on qualified withdrawals.5

These drawdown guidelines may or may not be right for you. Speak to your financial advisor or tax professional about how you can minimize taxes by drawing on the optimal combination of accounts in retirement. 

Staying Disciplined with Spending

Your spending in retirement will likely change over time, based on your health status and lifestyle choices. New retirees typically spend more than people in their 70s and 80s because they are less likely to have downsized their home and typically travel more.6 Expenses may also rise if health problems or the need for long-term care become part of your life. It’s a good idea to monitor your retirement accounts annually to see if adjustments in spending are needed based on changing life circumstances.

Going Deeper: Withdrawal rates and sustainability

As you live out life in retirement, you’ll want to make sure your rate of withdrawal from your savings is sustainable. That may mean making adjustments to how much you’re spending if a changing market environment or unforeseen personal expenditures cause you to deplete your savings too quickly. Because of the complexity of an individual’s financial circumstances and the potential consequences of getting withdrawal rates wrong, one retirement research group recommends that “Choosing an appropriate withdrawal rate should be done with the help of a qualified advisor with expertise in this question and with the assistance of computer software.”7

Leaving an Inheritance

It is better to do your estate planning now than to wait until you or your spouse become sick. Some factors to consider:

  • Check beneficiaries listed on your insurance policies and retirement savings accounts to make sure they reflect your intentions.
  • Make sure your will is up to date. A will can provide instructions about the care of minor children and the distribution of assets upon the owner’s death. It also names a trustee to carry out orders. Without a will, these decisions will be made in probate court.
  • Protect against sudden wealth. If you don’t want your children to inherit your estate all at once, you may need to plan for that by setting up a trust. Some trusts are designed to include conditions for inheritance (e.g., earning a college degree or reaching a specified age) while others allow for your estate to be paid out gradually over time.
  • Have a current power of attorney and health care proxy in place to make clear who you want to take care of you and make health-related decisions on your behalf if you become incapacitated.

 

Your estate attorney can advise you about leaving an inheritance to your heirs. Speak to family members ahead of time about your wishes in order to prevent misunderstandings down the road.

Stage 3: Potential Pitfalls to Avoid

  • Overspending so that your retirement savings become depleted. 
  • Not taking your required minimum distributions (RMDs) if you’re over age 70½. 
  • Taking IRA withdrawals that unknowingly bump you into a higher tax bracket.

Beginning the Journey

For many, their retirement years will be the happiest, most meaningful years. With the responsibilities of career and child-raising behind them, retirement can become a time to explore the world, strengthen relationships, learn new things and give back to communities.

Careful planning throughout each stage of retirement is critical to success. The first step in your journey involves gaining a clear vision of what you want your future to look like—your “destination” if you will. With that vision in mind, you will be ready to set specific saving goals that will drive decision-making going forward. We recommend consulting with your financial advisor to decide how to address the risks that can threaten your retirement goals. Your advisor can also steer you toward the optimal strategies for managing taxes along the way. Armed with a well thought-out plan, you will be ready to move forward with confidence, knowing not only where you’re headed, but how to get there.


1 David Littell. Retirement Risk Solutions, The American College, 2014.

2 Financial Planning Profiles of American Households, Certified Financial Planner Board of Standards, Inc., September 2013.

3 Brian Portnoy. The Proof that Most Investors are Their Own Worst Enemy, Forbes, June 13, 2016.

4 David Littell. Retirement Risk Solutions, The American College, 2014.

5 Littell. Retirement Risk Solutions.

5 https://www.irs.gov/retirement-plans/roth-iras.

6 Littell. Retirement Risk Solutions.

7 Consumer Expenditure Survey, U.S. Bureau of Labor Statistics, August 2016.

The tax information contained herein is provided for informational purposes only. AMG Funds does not provide legal or tax advice. Always consult an attorney or tax professional regarding your specific financial or tax situation.

Investing involves risk, including possible loss of principal.

Diversification does not guarantee a profit or protect against a loss in declining markets.

AMG Distributors, Inc., a member of FINRA/SIPC.

Standard Deviation: Annualized standard deviation is a measure of the dispersion of a set of data from its mean. The more spread apart the data, the higher the deviation. Standard deviation is calculated as the square root of variance.

Sharpe Ratio: The Sharpe ratio is calculated using standard deviation and excess return to determine reward per unit of risk. The higher the Sharpe ratio, the better the portfolio’s historical risk-adjusted performance.

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