Retirement can be an exciting and rewarding time of life, but it can also pose a number of challenges to your investment planning. As you plan for retirement, you may consider a number of different goals—traveling the world, helping raise grandchildren, the challenge of learning something new or simply maintaining your current lifestyle. Whatever your personal retirement goals, you will likely need your investments to provide income to meet your personal and financial needs.
How much income is enough for retirement? That depends on your personal situation, but overall the earlier you start to plan, the more time you have to build up your nest egg to protect yourself from retirement costs and any unanticipated expenses after you retire. It is never too early to begin thinking about your retirement goals and what you need to do to reach them. Retirement planning requires assessing both short-term and long-term needs and determining what steps you need to take to help ensure your investments can provide for both.
Consider the following when thinking about your personal retirement goals.
When determining your personal retirement goals, it may help to know some common investor goals for retirement planning. Here are some of the most common investor goals we’ve seen:
To achieve your personal goals, you have to assess how long you might need your money to last, how much cash flows you plan to take and how your investment strategy can benefit your specific situation.
When you look at your investments, consider how they should work for you and your retirement goals. For example, would the extra luxuries, hobbies or travel you want to indulge in require additional income? If you need additional funds, how accessible and liquid are your investments? Cash is easy to access, but over time inflation may reduce its buying power. Stocks and bonds are generally liquid and can provide growth and flexibility. Annuities and real estate, on the other hand, may be less liquid. They may not be accessible immediately to provide cash flow.
As you plan for cash flow needs, it is important to keep in mind that your living expenses could change over time. To help ensure you have enough money to cover those expenses, you should consider your investment time horizon—how long you need your money to last—and the impact of inflation. Retirees today often overlook their investment time horizon, which may be longer than they think. Your investment time horizon may be your life expectancy, your spouse’s life expectancy or a different length of time depending on your investment objectives.
Life expectancies are generally increasing and retirees may enjoy a long retirement—and a fixed monthly income may lose purchasing power over this time due to inflation. This is why it is so important to account for inflation’s impact when planning for retirement. Medical costs frequently make up a large portion of retirees’ budgets, and since 1990 they have risen faster than inflation.[i] You may need to consider the difficult topic of planning for unforeseen health issues. Financing long-term care or assisted living for yourself or a family member may raise your future annual expenses.
Consider the impact of inflation and a potentially longer investment time horizon when evaluating whether or not your retirement strategy is on track to meet your financial objectives. A portfolio with a higher concentration in bonds may be too conservative to meet your longer-term needs if your lifespan ends up longer than you expected, or if you plan to leave assets for your heirs. Evaluating the appropriate asset allocation can be challenging, but is essential to reach your long-term goals.
It is important to look at your overall financial picture when assessing your financial situation. One place to start is an assessment of your investments and current retirement savings in IRAs, 401(k) plans or other investment accounts. Then consider your non-investment income, such as income from salary, pensions or Social Security. Next, develop a cost estimate for retirement. You will need to use this information to select the asset allocation, which could include stocks, bonds, cash, or a mixture of asset classes. Your personal objectives, long-term retirement goals and time horizon should all guide your asset allocation decision.
Many people rely on their investment portfolio for necessary cash flow to cover living expenses after they retire. If that’s the case for you, you would need to have the appropriate asset allocation to allow your current retirement investments to grow enough over time to reach your goals and provide that necessary income. If you have a long investment time horizon, your portfolio may need to hold more high-growth securities, like equities. This helps ensure your portfolio can grow to allow your cash flow to keep pace with inflation. If you neglect to plan for a sufficient investment time horizon and the impact of inflation, you could find yourself with an overly conservative portfolio.
Your needs may change over time, so it is important to develop a strategy that can meet your growth and spending needs throughout your retirement. To help ensure the best chance at providing the retirement income you need, your portfolio and asset allocation may need to adapt to different stages of your retirement or changes in your investment goals. In addition to selecting asset allocation, maintaining the discipline during market volatility to adhere to your plan is critical for achieving the investment growth you will likely need. To generate long-term growth, you may need to accept some short-term volatility.
Putting all these pieces together can be a complex process. A trusted investment adviser can help you assess your current investments or strategy, help you form a plan to achieve your retirement goals and provide expertise and discipline throughout the process. Contact us today or download one of our educational retirement guides to discover how you can benefit from our services.
[i] Source: FactSet, as of 01/09/2018. BLS Consumer Price Index data from 12/31/1990-12/31/17.