It’s getting complicated.
Retirement is supposed to be a time of stress-free leisure; travel, family, hobbies and generally doing what one want’s to do, rather than what one has to do. Yet like everything in this increasingly hyper-connected and always-on world, retirees seem to be experiencing angst and anxiety later in life, driven by longer life spans and the very real question of how it will be funded.
Indeed, InvestmentNews reports that the average life expectancy once a person reaches age 65 is 84 for men and 87 for women. If they reach age 75, men can expect to live to at least 86 and women 88.
Translation—the longer a person lives, the longer they will live, and they’ll need a way to pay for it.
It typically involves making the most of what they have. Accumulation is only the first part, and it’s the tax-efficient drawdown of those accumulated assets (also called de-cumulation) where, if not done right, it may not last as long as they need it to. For this reason, the distribution stage must be precise, or retirees face the prospect of running out of money before they run out of life.
“It’s made even more difficult due to what’s known as sequence-of-return risk, or the risk of retiring in a down market,” says Keith Wiltfong, CFP® with Florida-based Capstone Planning Investments. “Not only is the value of the overall investment portfolio reduced because of poor market performance, but retirees are withdrawing assets to pay for living expenses. Those assets are therefore no longer available to take advantage of a rebound, which adds to the acceleration of the portfolio’s depletion.”
It’s the specific nature of this new reality which has led many financial advisors to be more targeted in their planning. No longer a short period of rest after a lifetime of hard work, retirement is now expected to potentially last 30 years or more.
For this reason, budgeting for different retirement phases, first detailed by financial professional Michael Stein in his book Prosperous Retirement: Guide to the New Reality, is increasingly popular.
In it, Stein describes early retirement, which he calls the “go-go phase,” or the period from the person’s date of retirement to age 80. The go-go phase is characterized by travel, new hobbies and spending that can equal or exceed spending amounts experienced just prior to retirement.
It then moves to the “slow-go phase,” which occurs in the 80s and is described as a quieter, less expensive and often introspective time when frugality and the impact of inflation are considered.
The third and final stage, called the “no-go phase,” is typically experienced at age 90 and older and is just as it sounds; frailty and long-term care costs are typically the focus.
In each stage, the plan is to hit a pre-set, targeted rate of return, plus 3 percent in order to account for inflation.
Like any large project, breaking it into smaller parts and targeting each separately makes it less daunting, retirement included. It then becomes a question of taking the right distributions from the right accounts in the right amount, meaning different qualified and non-qualified investment vehicles, as well as Social Security, and an allocation towards long-term care if needed.
“The bucket of money the retiree has accumulated is turned into a stable stream of income,” Wiltfong concludes. “Whether it’s through the use of exchange-traded funds, indexed funds, immediate annuities or deferred annuities, like fixed index annuities, ultimately the goal is to protect their income in retirement.”
Name: Keith Wiltfong, CFP® Chief Compliance Officer (CCO) and Managing Director
Email: Send Email
Organization: Capstone Planning Investments LLC
Source URL: http://councilofeliteadvisors.com/liftmedia
Release ID: 139876