Achieve Your Retirement Vision: Focus on What You Can Control
How much is enough to retire? This seems like a simple question and ideally there would be a tried-and-true method for coming up with a specific dollar amount that assures you many comfortable and productive post-employment years. However, there are many variables outside your control that make this question much more difficult to answer, for example, investment returns, inflation, and monetary and fiscal policies.
Instead of focusing on what you can’t control, it’s often better to focus on those things you can control.
Our article titled "Planning for a Meaningful Retirement Begins With a Vision" discusses how Baby Boomers might address the qualitative issues relating to their retirement by answering questions about specific goals. The next step is to look at quantitative factors, or more specifically, determining how to turn your vision into reality. This means employing planning and investment strategies that can help maximize your chances of providing for your retirement needs — regardless of what the uncertain future may bring.
Live within your means
Ensuring that your nest egg is able to support you during retirement means making sure you are living within your means. In other words, keep the withdrawals from your portfolio to a sustainable level. Studies suggest that by limiting annual withdrawals to 4 – 5 percent of a portfolio’s value, it is less likely that you will exhaust your assets during your lifetime.
Generally, this can be a way to gauge whether you are living within your means. Reducing your expenses to a sustainable level may not be your first choice, but it’s at least something you can control. You’ll probably agree that the sacrifice is preferable to having anxiety about running out of money or taking more risk than you can afford, which could make the situation worse.
Manage risk in your portfolio
In constructing your investment portfolio, focus on diversification without taking on more risk than you are comfortable with or need. This is especially important in light of the historically low interest rates over the past few years.
The lack of yields on cash and shorter term fixed income investments make it difficult to get reasonable yields without taking too much risk. There is temptation to take on more risk than you otherwise might in order to generate returns. While this may be appropriate in some situations, risk should still be evaluated carefully so you don’t take on more than you are able to bear both mentally and financially.
It’s also important to consider the impact of negative returns during retirement. In the article "Your Investment Portfolio, Market Volatility, and the Sequence of Returns," we describe the effect that the timing of investment returns has on the value of a portfolio, especially during the distribution phase. Unfortunately, investors cannot control the order in which returns are generated by capital markets. As noted in the article, significant negative market returns, especially in the early years of retirement, have a dramatic impact on how long a portfolio might last. A well-diversified, risk-managed portfolio will minimize your chances of this occurring.
Consider using annuities to transfer risk
Annuities are a popular strategy that allow you to shift investment risk to an insurance company, and in return, receive a stream of payments for a set number of years or for life. Annuities are typically either fixed or variable.
With a fixed annuity the insurance company controls the investments and you get a predetermined stream of payments in return. A variable annuity allows you to control the investments and the insurance company typically guarantees a minimum annuity payment. Although variable annuities can be expensive, they may be a good option for a portion of the retirement funds of retirees who want to invest in riskier securities, but still have some risk protection from the guaranteed annuity stream.
Tax efficient distributions
It’s also important that you distribute your investment assets in a tax-efficient manner. By managing the amount of distributions between your pre-tax investments (IRAs and 401(k)s) and after-tax investments, you may be able keep from pushing yourself into a higher tax bracket in any given year. This will help stretch your retirement assets further regardless of your investment returns. Having a mix of both pre-tax and after-tax investments provides you with flexibility to better manage your tax situation during retirement.
Maximize your Social Security benefits
Many retirees are typically near the age of eligibility to begin collecting Social Security benefits. Decisions regarding Social Security benefits can be among the most important that retirees control and should be thoughtfully considered. Generally, the most important decision revolves around when to begin taking benefits between age 62 and 70. For married couples, there are a number of sophisticated strategies to maximize benefits and potentially provide greater longevity protection for the surviving spouse.
While the transition to retirement can be a challenge for some, being proactive about strategies you can control — and not focusing on a future you can’t control — should allow you to live your retirement vision with greater confidence.