Retirement Countdown: Is 2016 Your Last Accumulation Year?

1
107

Paul TarinsBy Paul Tarins IAR, RICP®, president and founder of Sovereign Retirement Solutions

You’ve worked hard your entire life and you’re finally ready to retire…but are you truly ready?

Let’s face the facts. According to an Employee Benefit Research survey, only 44% of workers have actually tried to calculate how much they will need to save for retirement. Most people look at age as the driving force behind selecting an appropriate time to retire; at the same time they don’t take a look into expected income needs, and they have not developed a plan to meet those needs in what can easily be a 25 to 30-year retirement.

So if 2016 is your projected year of retirement, then it’s time to develop a discovery process that includes a working checklist in order for you to evaluate the real possibility of a successful retirement. Let’s investigate this process.

You Must Know Where You Are to Know Where You Are Headed

Develop a financial snapshot. Do this by creating two documents:

  • Your financial statement or net worth statement. Add up your investable assets in all your accounts and list the equity you have in your home and any investment properties, including any businesses.
  • Your cash flow statement or an income and expense statement. This is your budget; it simply measures how much money will come into your household vs. how much money is necessary to maintain your desired lifestyle. Since some expenses occur only once a year, this can be measured on a monthly or an annual basis. Consider things like a mortgage that will be paid off in the first few years of retirement or vehicles that may be paid off at a future date. You can use the information on this statement to help you determine how your money is spent and how you can manage your finances to improve your net worth.

Envision Your Retirement

Everyone has their own unique vision of retirement and lifestyle goals. Without a clear vision, it’s difficult to financially prepare for your next chapter in life.

Retirement possibilities may include leaving your current career and entering the career you always dreamed of, or perhaps you will still earn income that may meet some or all of your retirement needs. Maybe you will phase out of your full-time position into a part-time position with the same company, or you might just retire full-time and not work at all.

Understand Retirement Planning

Retirement is essentially about having the ability to create an income stream that will give you the lifestyle you want. The way you invest during your working years, or during the years you are accumulating assets, is orchestrated very differently than the way you invest during your retirement. During the accumulation phase, how much you can make, or your return on investment (ROI), is the most important thing. Conversely, during retirement, reliability of income is of utmost importance.

When planning for retirement, you must address social security claiming strategies (especially if married), which will produce a guaranteed income stream during retirement. Choosing the right claiming strategy for your situation is significant in regard to your income. The longer you or your spouse can wait to claim your benefit, the larger the benefit will be.

Will you be receiving a pension through your employer or the opportunity to receive a lump sum payout? You will need to evaluate your guaranteed income, which includes social security and a possible pension. Once this amount has been calculated, subtract this from your estimated budget. The remaining balance will be the gap of additional income needed from your current assets.

Once you’ve identified the gap, then it’s time to make some critical choices. Are your accumulated assets able to produce a safe withdrawal rate when considering sequence of return risk, particularly during the first 10-years of your retirement?

Understand Retirement Income Withdrawal Hazards

Sequence of return risk is by far the greatest hazard to retirement income withdrawals. Inflation risk, or the sequence of inflation, comes in a close second.

The concept of “sequence of returns” risk draws on research of safe withdrawal rates. Even if short-term volatility averages out into favorable long-term returns, a retiree could still be in significant trouble if the sequence of those returns is unfavorable, i.e., bad returns occurring at the beginning of retirement. The sequence of returns doesn’t matter when there is no cash flow in and out of a portfolio, even when there is extreme volatility.

A negative sequence during the first decade of retirement, even when withdrawing at an assumed safe withdrawal rate (4% indexed for inflation), can potentially ensure portfolio failure. Inversely, a positive sequence during the first decade of retirement has the potential to provide longevity.

There are many advantageous strategies to plan around sequence of returns in order to take the guesswork out of your plan. Working with a planner who can expose you to products that can reduce overall portfolio risk is a critical step toward making your assets last a lifetime.

How To View Your Assets To Provide For Successful Retirement

Based on the aforementioned unknown sequence of return risk, how should you view your portfolio?

  • You need growth. A proper risk-appropriate portfolio should be part of the discussion. A mix of equities and principal-protected products should be explored. It is critical during retirement that you have a full understanding of risk and potential losses that may occur during market corrections.
  • Have the appropriate amount of liquidity and cash reserves for your situation.
  • Plan for loss of income events, such as the death of a spouse.
  • Plan for longer life expectancies (longevity risk) and inflation.

This process of discovery is the first critical step in planning 2016 as your last accumulation year. A clear vision of the retirement planning process is vital to a successful retirement. With this farsighted approach in full view, your last year of work will be fully within your reach.

1 COMMENT

LEAVE A REPLY

Please enter your comment!
Please enter your name here

This site uses Akismet to reduce spam. Learn how your comment data is processed.