Start Thinking Early About Retirement Goals
OCEAN CITY -- Last week, we looked at ways to make sure you have enough assets to cover your retirement We continue that discussion this week.
Something that needs to be considered upon retirement and even before is, “What are your goals?”
“Investment returns are a means to an end,” Laster explains. “What people want most is to achieve their life’s goals.” The two biggest factors in achieving your goals are your anticipated lifestyle in retirement and your desire to pass along wealth. For the first, estimate the cost — whether for around-the-world travel, a new vacation home, continuing education or volunteer work — and then measure it against your assets. Coming up with those numbers can be tricky, he notes: “The vast majority of people overestimate how far their money will go in retirement.” (You can use Merrill Lynch’s Retirement Income Planning worksheet to get a better picture of how your potential assets match up with your goals.) Finally, consider what you’d like to leave after you’re gone. The greater the bequest, the lower the withdrawal you’ll want to take, Laster adds.What’s your appetite for risk, today and down the road?
Your withdrawal rate will also depend in part on how your portfolio is invested. Many young retirees, such as those between the ages of 50 and 65, might have somewhere between 40% and 60% of their assets in stocks to help achieve growth that outpaces inflation. (They should make sure to work closely with their Financial Advisors to actively manage their portfolios and take advantage of potential growth opportunities in today’s changing markets.) If you’re planning to draw down very conservatively, you can afford to have a substantial part of your portfolio in less risky investments, such as high-quality corporate bonds, Treasuries and CDs. “But if you’re drawing down at a very aggressive rate, say 6.5%, to have a better chance of sustaining that, you have to be very heavily in equities,” Laster says. If just the thought of that fills you with unease, then scale back your withdrawal rate.
Of course, it’s impossible to predict everything — market turbulence, medical crises and job losses are just a few of the surprises that can throw your strategy off course. One way to help stay on track, and to resist the urge to sell off stocks at a loss to pay expenses, is to create a dedicated bucket in your portfolio for short-term consumption needs. This bucket would be designed to generate consistent liquidity and income for the next two to seven years and be invested in CDs, high-quality bonds, Treasury inflation-protected securities (TIPS) and annuities. Other, more diversified parts of your portfolio can be invested more aggressively for growth and may be sold at optimal times to refill the short-term bucket.
“So if the markets are doing fine, you regularly replenish the short-term bucket. If the markets have sold off dramatically, you can bide your time and wait for them to return to normal,” Laster explains.
Once you have a strategy for withdrawal, remember to keep it dynamic. As market fluctuations or life circumstances change your income needs, you and your Financial Advisor can adjust the plan to accommodate them, allowing you to continue living well in retirement — and sleeping well at night.(A Merrill Lynch Wealth Management Advisor. She can be reached at 410-213-8520.)