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Are You Ready for Retirement?
Three Phases of Retirement Income Management
On January 1 2006 the first wave of 76 million baby boomers turned 60 years of age thus beginning their retirement journey.
As the boomers approach, enter and settle into retirement there are many financial and lifestyle issues they need to address.
The baby boomers are moving from phase 1 of the retirement planning process, the Accumulation Phase, to phase 2 of the planning process, the Preservation Phase. Decisions made in the Preservation Phase set the stage for phase 3, the Distribution Phase. It is during phase 3 of retirement planning that the set up of investments will be required for distribution of assets begins.
What’s different about the phases?
For starters, the risk tolerance standard is very different for each phase. Traditional risk/return profiles used in the set up of the accumulation phase, better known as the saving years, will often need to be replaced by a revised risk/return profile for phase 2 and phase 3 reflecting a new risk tolerance standard .
This new risk tolerance standard will set the tone for how and where their retirement monies are invested. Emphasis will be on conservation and preservation of principal while generating income and growth. The ability to recoup potential loss of accumulated assets in a market down turn during phase 2 and phase 3 of retirement income management becomes a significant consideration.
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The Retirement Planning Process
Frequently Asked Questions:
Q. At what age do I begin to plan for phase 2 and phase 3 of the retirement planning process?
A. We
suggest that the ideal time to begin planning the preservation and distribution phase of retirement is generally between age 50-55. The general rule of thumb is to allow at least five years to segue into a more appropriate portfolio.
Q. How do I prepare my investments as I near retirement?
A. Find a qualified financial advisor with a minimum of 10 years experience to help you with this process. The first step is to analyze your new risk/return profile as it relates to the investment of your current assets.
Your advisor will walk you through all the considerations required to make decisions on structuring your
investments.
Q. I don’t think I have enough money to actually retire. Now What!
A. Keep in mind at some point your ability to generate earned income will begin to diminish or end entirely. For some, retirement may bring the opportunity to explore new avenues to generate income, such as consulting work or work in a related field or through a hobby that has income-generating potential.
Q. Are the same mutual funds I have used for the accumulation phase still the answer for growth once I’m approaching retirement or when I’m in retirement?
A. You will need to do your homework here. The first step would be to determine whether the investments you currently have meet the new standards of your pre-retirement/retirement risk/return profile. It is very important to keep in mind that past performance does not guarantee future returns when evaluating any investment.
Q. Should I take my money out of my 401k as a lump sum distribution?
A. Generally speaking no it is not wise to take a lump sum distribution. There are many options available to you that would preserve the tax status on the account and still provide you use of your money at the time it is needed. Seek the help of a qualified financial advisor to guide you through this process.
Q. Should I keep my 401k money with my company after I retire from the company?
A. Usually you will have more investment options if you roll your 401k balance into an IRA or perhaps a series of IRAs outside your company plan. Also, given the fate of some companies’ retirement plans over the last few years, it may make sense to move all your money away from your former employer in the form of a rollover, where you know it will be safe from your employer’s creditors (in the event of financial difficulty).
Q. Is rolling over all my 401k money to an IRA or series of IRA’s a good idea?
A. The rollover strategy often provides you more diversity and control over your money than it being held captive in a company plan. Be sure to review the differences in the loan provisions and the beneficiary structures; while IRAs generally do not have loan provisions they offer more flexible beneficiary and withdrawal options.
Q. When is the best time to sell what I have and move it into something more appropriate?
A. A clear understanding of your new risk/return profile and the actual evaluation of the investments in question will serve as guidelines. Ask yourself two questions: what is your time horizon until retirement? And if the particular investment were to tank, how badly would it affect your total portfolio? Be cautious.
Q. What is a “conservative” investment portfolio?
A. A more conservative portfolio will reduce your risk of loss-of-principal in the preservation phase while positioning your money to provide income for the upcoming distribution phase. No two retirees will have the same portfolio; you want a customized set of investments to meet your unique goals and personal requirements.
Q. Should I move all my money to bonds?
A. Are you looking for income only? Some growth in a portfolio is important if only to hedge off inflation? Do you require a guarantee of principal? Bonds can be an excellent investment. Research whether a variety of individual bonds, a bond mutual fund or a bond index fund would best serve your requirements?
Q. Should I place all of my IRA money in a bank CD?
A. Certificates of deposit can be useful in planning retirement. It usually is not a wise investment decision to put all your money in any one investment vehicle.
Q. What kind of experience should my advisor have?
A. We recommend that you look for someone with a minimum of 10 years of successful experience in the financial services industry who has extensive experience in retirement income management for people age 50 and older. Obtaining references is always a good idea.
Q. How does “life planning” relate to retirement-income planning?
A. Life planning is usually done by advisors who are experienced and trained in helping you identify what your lifestyle will be when you retire. |
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