Know what you can tweak to find your ultimate retirement income mix.
As much as some of us would like to believe we can control everything, the truth is we can’t. Far from it. Some situations we can directly influence and others, well … not so much. Many retirees – even those who’ve planned and saved well for decades – harbor a distant fear that their money may not last as long as they need it to. When it comes to something as important as your retirement income, knowing what you can control, and by how much, may help you rein in that fear and save your energy for the things you can change.
Here’s how to achieve a level of comfort, not just with the parts you can control, but even the things you can’t, by doing your due diligence, understanding the possible outcomes and preparing for them within a margin of safety.
Where Your Money Lives
How and where you put your money to work is one of the largest areas of influence you have. In fact, asset allocation decisions affect total portfolio risk more than any other factor, according to “Determinants of Portfolio Performance,” a study published in the Financial Analysts Journal. Work with your advisor to position assets within your overall portfolio to help preserve and grow assets, and centralize as many investment income resources as possible to potentially reduce fees.
How Much You Spend and Save
Saving as early – and as much as possible – along with thoughtful spending is completely in your hands. Personal savings and income from working during retirement are expected to play a large role in funding retirees’ futures. Live within your means and prioritize needs over wants with a plan that keeps you accountable and on track. Your advisor can help you decide on a withdrawal rate to keep you comfortable during a long and fulfilling retirement. Depending on market returns, this rate may need adjustments.
How Long You Work
In the past, Social Security and company pension plans were enough to fund retirement – not so much these days. And, while you may want to work in retirement, nearly half of retirees in 2014 left the workforce before they planned to due to health concerns or caregiving responsibilities. Company changes also were factors. So, be sure to have a backup plan – you may have to draw income earlier and make your portfolio last longer than you thought. It’s also important to optimize your household Social Security benefits using a thoughtful filing strategy.
While you don’t know for sure what will happen, you can increase your chances of a long, healthy life through better healthcare, preventive care and good nutrition. Living longer means longer retirement horizons – and concern for outliving your savings. Plan for the best-case scenario.
A couple aged 65 has a 25% chance of one of them living to age 96.
Source: 2012 Individual Annuity Mortality Basic Tables – Society of Actuaries, 2000-2004 Reports.
Out of Your Control
No matter how much you try, there are always unknowns to face – flat tires, unexpected health event, finding the perfect vacation home before you’re ready – that you can’t exactly plan for. But you can build in a contingency plan by creating a financial cushion should you need cash on short notice and by mitigating risks with proper insurance coverage (e.g., long-term care insurance). Consider which unanticipated events you can take early action on (some are easier to protect against) and work with your advisor to run hypothetical scenarios to see what you can handle with confidence.
Even with thoughtful planning, no one has ever been able to predict what the market might do – volatility can be particularly challenging when you might not be working. So be thoughtful about what you’ll do if you encounter a series of less-than-ideal market returns, like tapping into cash reserves to avoid selling in down markets or taking advantage of diversification strategies* where one part of your portfolio may be working when another may not be.
Remember, even with a shorter time horizon, retirement isn’t the time to swing for the fences and take on unnecessary risk to attempt to make up for losses. Instead, talk to your advisor about ways to boost or diversify income streams.
The Cost of Living and Taxes
Things cost more over time. The inflation rate for retirement-age Americans is higher because they spend more on items that rise fastest in price, such as healthcare and housing. Taxes can also eat up a chunk of your retirement income.
Think about investing a portion of your savings in equities and real assets, which may help hedge against inflation. However, this does involve risk including the possible loss of capital. Or, remember that Social Security is a major income stream that offers cost-of-living adjustments.
As for taxes, without knowing when the government may implement a change that may affect you, be sure to take advantage of savings in tax-favored accounts, particularly those geared toward retirement.
It may help to know that you can control many of these interconnected factors either directly or indirectly when it comes to fortifying your retirement income strategy. You are your best advocate when it comes to fulfilling your retirement dreams, so be sure to exercise your power thoughtfully and proactively. Your advisor can help you stay ahead of the game and implement a plan that reflects what’s most important to you.
*Diversification does not guarantee a profit nor protect against loss.
Asset allocation does not guarantee a profit nor protect against losses. Sources: Employee Benefit Research Institute, Matthew Greenwald & Associates, Inc. 2015 Retirement Confidence Survey. Data as of March 2015. J.P. Morgan Guide to Retirement.