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:
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.
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.
Your retirement savings are exposed to different kinds of retirement risk.1 From an investing standpoint, risks to consider include:
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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
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.
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.
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
It is better to do your estate planning now than to wait until you or your spouse become sick. Some factors to consider:
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.
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.
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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