Part Three: Retirement in Times of Uncertainty – Managing Retirement Income

For years, many retirees and people near retirement could bask in the near certainty that with sound asset allocation and a long term investing perspective, they could expect a steady and possibly even a growing stream of income during retirement.  Unfortunately, the recent global credit crises and ensuing recession has forced many investors to reevaluate their retirement income strategy.  Given that we are in a period of unprecedented uncertainty and global economic turmoil, what can be done to help provide a stress free retirement?

Clearly define your current and future income needs
The amount of income you require changes over time and is different for everyone but there are generally four phases that are relevant to most individuals.

  1. The Spending Spree: During the first phase, people tend to initially spend a bit more than they did while working because of pent-up demand for activities like traveling and remodeling.This phase typically last 2 to 4 years and spending tapers off over time.
  2. Reversion to the Mean: In the second phase, expenses tend to decline back to the pre-retirement level as the activities on people’s “want-to-do” list gets completed.
  3. The Golden Years: During the third phase, overall expenses usually decline even further as people settle into their golden years and become less active. However, a notable exception is that health care expenses generally rise during this stage and should be taken into account as part of any comprehensive financial plan.
  4. Accelerating Expenses: In the fourth phase, expenses can accelerate significantly due to the increased cost of health care and senior support services. Although this phase is typically the shortest, it tends to consume a relatively large portion of total retirement assets.

An understanding of these phases provides valuable insight into your potential  income needs and enables you to proactively plan for the future. It will also be helpful to consider both essential and discretionary income needs so that you can build some flexibility into your ultimate plan in order to respond to the many unanticipated future events that may occur.

Conservatively assess where you stand now
After projecting your future income requirements, the next step is assessing the likelihood that your resources will be adequate to meet these objectives. You should work with your financial advisor to establish reasonable assumptions for income growth, investment return, tax rates, inflation, etc. so that you will have a general idea regarding how close you will be to meeting (or exceeding) your goals. When making assumptions, it is best to use conservative estimates so that you won’t be taken by surprise by any unseen bumps in the road.

Create a strategy for success
After determining where you currently stand in relation to your goals, you can make adaptive choices to ensure success or you may decide that you don’t need a second vacation home and maybe your children can take on student loans or work part time to help cover education expenses. Delaying retirement, working part time and selling a primary residence are all common tactics for getting your financial plan back on track.

It’s also important to speak with your financial advisor about tactical distribution strategies such as whether to take distributions from your Roth or regular IRA first and what allocation of income versus growth investments is optimal.

Regularly review your strategy and progress
Life is an ongoing process of adapting to change and any retirement income strategy must be regularly reviewed and revised to ensure long term success. Changes to tax law, economic conditions, your personal life and health challenges are all things that could affect your strategy. Meeting with your financial advisor at least annually will help you stay informed and on track to meet your goals. Independent studies have shown that people who meet at least once a year with their financial advisor are more likely to feel confident about their future and to successfully achieve their retirement goals.

If you have any questions or concerns about your retirement strategy and progress, we would be happy to have a conversation with you so feel free to give us a call or send us an email.

All the best,
Pacific Mountain Advisors Team

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