Organizing Your Transition to Retirement

Like most people, you’ve dreamed of trading in a daily work regimen for the freedom of retirement. You’ve planned, saved, and accumulated a nest egg to finance the next phase of your life. Now that you’re facing retirement, what should you do with your money?

There’s no shortage of retirement accumulation planning guides, but when you need guidance on how to best utilize your assets during retirement, solid advice is hard to come by. How can you cut through the clutter and begin the transition process in a thoughtful, organized, informed, and confident way? This guide provides useful steps and ideas to get you started.

1. Envision Your Retirement

Habit is powerful. For many, retirement marks a significant change in daily routine. The change can be emotionally difficult and may require some degree of adjust¬ment. A little advance planning may help you smooth the transition. Consider: How will you spend your days? Work part-time? Volunteer? Travel? Relax? What are your lifestyle/activity plans? Are your plans complementary with the plans of your spouse/partner? Can you afford the lifestyle that you seek? Do you agree on how money will be spent? Do you feel confident in your ability to make your money last?

2. Put Your Vision and Concerns on Paper

There are so many variables to consider that planning may seem overwhelming. Putting initial plans and concerns on paper can help clear the cobwebs and improve your focus.

• Your lifestyle in retirement
• Retirement issues that concern you
• Your expected sources of income in retirement

3. Share Your Vision with Your Financial Professional

Your written concerns and plans may give your financial advisor valuable insights into what is important to you. He/she will assess your total financial picture and help set realistic expectations about your income and expenses, in light of your lifestyle plans and concerns. Then, you’ll work together to modify your portfolio allocation to support your goals. To create an accurate view of your financial picture, your financial advisor will need to gather data from you.

4. Take a Close Look at Your Cash Flow and Budget

At retirement, you may stop receiving a regular paycheck and begin paying your expenses from an account funded by cash inflows (pension, social security, etc.) and/or the proceeds of assets that you sell. You’ll want to pro-actively manage your assets and liabilities and your spending habits (budget) simultaneously to ensure that you don’t run out of money. You should seek advice from your investment professional and/or other advisors to understand your options in managing this balancing process effectively.

5. Organize Your Retirement Assets and Liabilities

You may have accounts with multiple institutions. Here are some tips to help you organize your retirement assets and liabilities.

• Write it all down—Use a Personal Balance Sheet to list all your various assets and liabilities in one place This provides a clear view of your entire financial picture. Similar to the way a company actively manages assets and liabilities, your Personal Balance Sheet (and Cash Flow Statement) will be powerful tools in managing your finances throughout retirement.

• Consolidate your assets—Maintaining accounts with different institutions is often costly and cumbersome. You may save money and simplify your life by consolidating all accounts with one investment professional. Also, having the assets in one place simplifies the process of settling your estate. One day, your heirs and/or executor/executrix (person named in the Will to manage your estate) will be grateful that you made a difficult chore easier to complete.

• Review account types—You may have a number of different account types, such as bank accounts, 401 )k)s, IRAs, annuities, pension plans, taxable investment accounts, etc. Working with your investment professional and accountant, you can determine which assets should be liquidated at any point in time. The reason is that tax consequences vary by asset and account type and should be taken into consideration. Also, for some types of accounts (e.g., lRAs and 401 (k(s) you’re required to take minimum distributions after age 701/2. You’ll need to plan to meet these requirements.

6. Understanding Retirement Traps and Risks

It’s important that you have a working knowledge of possible retirement traps and risks. Most retirees focus on financial risks, more than other types, when working with their advisors. However, you should consider all types of risk that could significantly impact your retirement lifestyle.

• Timing of Returns—Early losses in retirement can undermine long-term planning. The impact of taking withdrawals during a bear market can have irreversible effects on the longevity of your assets. Conversely, beginning your retirement during a bull market can help offset withdrawal amounts simply because investments will rise given favorable market conditions.

• Rate and Nature of Withdrawals—If you withdraw too much too soon from your assets, you run the risk of running out of money long-term. Just a 1% difference in withdrawal rate can have a huge impact on how quickly the assets are depleted. Liquidating assets in a tax-efficient way can preserve them a bit longer because you generally pay lower taxes on transactions resulting in capital gains than ordinary income. Naturally, you need to balance such choices with the need for an allocation to equities to provide growth potential for certain assets. The timing of your withdrawals can make a big difference in the long run, as well.

• Longevity—Living to a ripe old age may be great, but if you only plan financially to cover your average life expectancy, you could ultimately outlive your assets. You can reduce this risk by overestimating your life expectancy.

• Inflation—Rising consumer prices will erode both your purchasing power and the return on your investments. An annual inflation of 3% can double your living expenses over a 25-year period. You can see why it’s important to adjust portfolio and income plans for inflation. You might also consider cost-of-living increase options/riders on existing annuities or life insurance policies.

• Healthcare Costs—Healthcare costs are high and are rising faster than other costs. Research has shown that three out of four retirees are concerned about paying healthcare expenses not covered by Medicare/Medicaid. In addition, employer-provided medical benefits for pre-retirees and retirees have been steadily decreasing over the past decade. In light of these trends, you should be prepared to set aside sufficient resources to pay for the rising cost of medical care and prescription drugs.

• Asset Allocation—Asset allocation strategies in retirement differ from those you might have used while accumulating assets. Portfolio volatility becomes a greater concern due to the impact of withdrawals. Typically, you’ll want to optimize income to pay for your expenses, while providing growth potential to hedge against inflation longer term. Cash inflows such as social security, pension payments, and guaranteed product payments could be thought of as supporting your basic needs, whereas the managed portion of your portfolio could support a smaller segment of basic expenses, and the lion’s share of wants (or discretionary) expenses. Your equity assets might be allocated in a diversified way for 3—5 year periods (at a minimum) so that they have a greater length of time in which to provide the returns you seek. These are important points that you should discuss with your investment professional.

• Legacy—Ultimately, you may want your assets to grow so you are able to leave an inheritance. So long as you “pay yourself first” and have sufficient assets to support a life span beyond average life expectancy, you will be able to invest surplus assets to create the legacy you wish to provide.

7. Evaluate Your Options and Make a Plan

Some pundits say that you need 70—80% of your current income to maintain your lifestyle during retirement. This may not be true for you—one size does not fit all. Your income needs may be much lower or could be 100% of what you earned before you retired. So, how do you figure out the ideal amount of your retirement “paycheck?” As we described earlier, you need to analyze your monthly expenses and compare the total to your guaranteed monthly cash inflows. You’ll either come up short or have enough income. Next, you need to weigh your options. While not comprehensive, the following are some of the options you might consider in discussions with your investment professional:

If your guaranteed cash inflow is sufficient to pay basic expenses, you may want to:

• Set up a Systematic Withdrawal Plan (SWP) from investments to receive a fixed sum on a periodic basis, while you maintain the remainder of your portfolio. Be aware that the value of your investment will change as markets fluctuate. This will provide cash for discretionary spending.

• Invest conservatively (diversified mix of fixed income, equities, and cash), then continue to monitor your asset allocation. After the first 7—10 years of retirement, you may actually be able to increase your risk profile.

• Collect dividends from your retirement assets to help pay for discretionary expenses.

• Create an emergency fund to help cover unexpected, substantial expenses and reduce the need to access shorter-term investments.

If your guaranteed cash inflows do not cover your basic expenses, you may want to:

• Reduce discretionary spending. Though not always easy, it’s imperative to budget and cut discretionary spending as needed when living on a fixed income.

• Take distributions from your retirement plan assets to meet basic expenses.

• Consider a SWP to provide long-term income, as well as maintain an investment portfolio to provide potential investment growth as described above.

• Consider setting up a guaranteed source of income to help you budget. Just as you relied on regular paychecks while working, a guaranteed source of income creates a financial “floor” that you can count on to cover your fixed expenses.

• Either maintain a conservative investment allocation or increase your risk profile and periodically reassess your portfolio’s asset allocation and balance. Increasing your risk profile may not be advisable on those assets intended to support basic expenses. Speak to your investment professional about your risk tolerance and portfolio allocations.

• Consolidate accounts, wherever appropriate, to reduce annual expenses.
• Start an emergency fund using dividends collected from your retirement assets.

8. Obtain The Professional Advice You Need

For many people, retirement plan assets represent the largest portion of their nest egg. Regardless of how much money you’ve accumulated, exactly how you manage your assets while retired could seriously affect your long-term financial security While you could make your own decisions about how to deploy your retirement savings, with so much at stake, it’s wise to seek the advice of an investment professional. An investment professional will take the time to understand your personal situation and make a thoughtful recommendation given your unique needs.

9. Reassess Your Plan, At Least Annually

Meet with your investment professional annually to monitor your investments and rebalance or reallocate your portfolio as your needs change. With so many variables involved in retirement asset planning, you’ll want to keep a close eye on your portfolio to spot any potential problems early. One way to become more comfort¬able might be to conduct reviews every six months for the first two years of retirement, then cut back to once a year going forward.