As we transition from pre-retirees to retirees and we begin to spend from our assets, our need for how our wealth is managed also changes. Retirement becomes much less about a focus on return on investments and instead becomes a focus on reliability of income and management of risk.
Continuing to manage our wealth using the same approaches we used while we were accumulating resources does not address the increased retirement risks we face and could leave us vulnerable to some unintended consequences including outliving our resources.
If you are preparing for retirement or are already retired, understanding some of the financial risks you face can help you better position yourselves for retirement by taking some steps to help manage your total retirement risk.
Because we are facing a reduced earning capacity as we age, what we have accumulated for retirement resources becomes very important. Now we need to turn our resources into an income stream and make our assets last for our retirement. A well thought out retirement strategy will help protect your retirement from spending shocks, inflation, longevity risk, income tax inefficiencies, and increased investment risk.
Unanticipated large expenses may include long term care needs, changes in housing needs, care or support needs for other family members or any short-term emergency needs. It is difficult to predict how this might come about but the importance of maintaining liquidity and flexibility to be able to respond to any unplanned large expenses cannot be understated as it can help protect the value of your investment portfolio which is needed for your retirement.
Inflation erodes buying power over time. The diversity of our retirement income resources and structure of our investment portfolio must incorporate adjustments for inflation to help manage our purchasing power through retirement.
Do you know how long you need your money to last? Some experts say approximately half of the population will outlive their actuarial life expectancy. Does the design of your retirement plan allow for living a longer life? Living a longer life requires a larger pool of assets to cover increased costs and may require increased diversity in retirement income resources to help manage the risk of outliving our resources.
Ignoring the income tax consequences of our retirement income strategy could mean we are losing money by paying higher taxes throughout our retirement which instead could be in our pockets each month. A tax plan overlay as part of our retirement strategy can help you keep more of what you draw from your various retirement resources.
When we retire, our exposure to investment risk increases because we are no longer adding to our assets and we are also beginning to spend from this resource. The timing of our retirement and market returns we see early into retirement make a big difference in the sustainable spending rate from the investment portfolio for the remainder of our retirement. When we first retire, our retirement portfolio is at maximum risk for a market decline because this is the time when the money needs to last the longest. Incorporating a plan to help manage the impact of a market decline on the portfolio is needed to help address the increased investment risk.