As people near retirement, the traditional strategy has been to move all growth-oriented investments to more conservative vehicles. This might have worked fine back when retirement was expected to last only five to 10 years, but these days people are living longer. It’s not unusual for someone retiring at age 65 to live to age 90 or older. Consider that you might need to plan for your nest egg to continue growing and last potentially 25 to 30 years.
One of the most difficult things to plan for is how to not outlive your savings. Diversifying your retirement assets among a variety of vehicles – both insurance and investment oriented – may offer the best chance of meeting your retirement income goals throughout your lifespan.
To get started, it’s important to determine how much annual income you’ll need in retirement. Once you estimate this sum, subtract the amount of income you expect to receive from other sources, such as an employer-sponsored pension or Social Security benefits. The remaining amount is how much your personal retirement assets will need to generate each year for the rest of your life.
The next step is to identify all of your personal assets, including an employer-sponsored defined contribution plan (401k, 403b or 457), IRAs, stocks, bonds, mutual funds, annuities and bank accounts.
The third and final step is to determine one or more strategies in combination that will best suit your situation to provide income for the rest of your life. Retain a diversified mix across different types of investments and insurance in order to protect your nest egg from market risk, provide current income and allow the opportunity for your income to increase as you get older. This will help offset the rise in the cost of living over time and help pay for additional care and housing expenses in your later years.
Today’s retirement portfolio often includes an annuity, which can provide certain guarantees from the insurance company, such as a minimum level of income for a period of time or the rest of your life (and even your spouse’s life after you die). You can also pay for guaranteed income increases to help keep pace with inflation. An annuity designed to provide retirement income is typically purchased with a lump sum, so you might need to convert a portion of your assets (401(k), IRA, stock portfolio, etc.) to buy it. It’s a good idea to compare your tax liability associated with selling each option to help you determine the best asset to use for this purpose.
Some strategies you might want to include in your retirement portfolio include dividend-paying securities; a systematic withdrawal plan from your 401(k), IRA, or mutual fund portfolio; a lifetime annuity with a guaranteed income rider; and a cash-value life insurance policy that you can draw from for emergencies.
Given the longer lifespan of today’s retirees, it’s also a good idea to purchase a Medigap plan and a long-term care insurance policy. Think of this as part of your asset-preservation strategy because one of the biggest concerns in retirement is not necessarily outliving income, but outliving good health. Large, unexpected medical and nursing care expenses can drain a retirement portfolio if not covered by insurance. This is particularly important for couples, who can get caught in a situation where one spouse’s medical condition drains their retirement savings and leaves little for the healthy spouse to live on.
If you are married, remember that it’s important to construct a retirement income plan that will support both you and your spouse should one of you pass away before the other.