For many people, retirement planning is all about asset accumulation. Retirement is a substantial financial goal. To have a successful, comfortable, and financially stable retirement, you’ll likely need income that lasts for multiple decades. Generating that kind of income requires assets, hence the focus on saving and accumulation.
There is, however, another side to retirement planning that is just as important as asset accumulation. It’s asset distribution, or planning for how you will generate income from your retirement accounts. As you approach retirement, asset distribution takes on an even more important role. Your decisions about how and when to take money from your accounts may significantly impact how long your assets last.
You may have retirement funds spread across a variety of account and asset types, such as a 401(k) plan, IRAs, and maybe even non-qualified investment accounts. How do you determine which assets should generate retirement income and when those distributions should happen? How do you increase the probability that your assets and income will last through a long lifespan?
It all starts with planning. The sooner you address these issues, the more options you may have available. If you haven’t started the distribution planning process, now may be the time to do so. Below are a few questions to ask yourself:
How much income do you need?
This question addresses the core issue in any retirement distribution plan. You know you need income, but you don’t know how much. Take too little and you may not be able to support your desired lifestyle. Take too much and you could drain your retirement accounts too quickly.
A budget can be a helpful tool in this process. You can’t predict every retirement expense, but you can estimate many of them. Create a projected budget with your anticipated retirement costs. Include any guaranteed sources of income, such as Social Security and pension payments.
If you have a gap between your guaranteed income and your total expenses, you will likely need to fill that gap with retirement account distributions. This amount can serve as a good starting point for your distribution planning. If the distribution amount seems to high, try adjusting your budget to reduce your income need.
What will your risk tolerance be in retirement?
When you’re saving for retirement, you may be tolerant of some level of risk. After all, there is often a correlation between risk and return. In an effort to grow your assets, you may accept that risk is necessary. Also, since you’re making regular contributions to your accounts, you may not be sensitive to short-term fluctuations and volatility.
In retirement, though, that thinking may change. The combination of regular distributions with a market downturn could substantially reduce your account balance. The investment strategy you had while accumulating assets may not be appropriate after you retire.
Consider how your tolerance for risk may change after you retire and how your allocation may need to be adjusted. If you shift to a more conservative allocation, can you expect enough return to support your distributions for years or decades? Consider tools and investment options that may allow for growth, but also minimize downside risk.
Are your distributions guaranteed for life?
For many retirees, their biggest fear is outliving their income. If you run out of savings before you pass away, you could find yourself in a challenging financial situation in the final years of your life.
One way to minimize that risk is to look for ways to guarantee your retirement account distributions for life. For example, annuities offer a variety of ways in which you can create a guaranteed lifetime income stream from your retirement savings. Some also offer growth potential with limited downside risk.
Ready to develop your retirement distribution strategy? Let’s talk about it. Contact us today at America’s Annuity. We welcome the opportunity to help you analyze your needs and develop a plan. Let’s connect soon.