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Retirement Planning

What is Retirement Income Planning and why is it so important?

Once we reach retirement, it is no longer about maximizing returns, but about maximizing income. It is difficult for most of us to make that shift in our mindset from the accumulation to decumulation stage. That is one of the reasons why it is vitally important to begin focusing on this stage life long before it is reached. There are many more risks that come into play once we start taking income from the investments we have worked and saved so hard for all of our working lives.  

  • A successful retirement plan must meet our goals and objectives.
  • A retirement income plan is one that develops stable sources to meet our income needs.
  • The plan must ensure that the stable sources of income can last a lifetime.
  • The retirement plan should optimize the remaining portfolio so that it addresses our ability to meet discretionary spending or legacy goals.
  • The plan must address the major risks that retirees face.

What are the key differences between the accumulation process and the decumulation process?

The accumulation phase of retirement focuses on encouraging us to save to meet a targeted portfolio amount by a specific date. The investment recommendations center on maximizing return within our risk tolerance parameters.

The decumulation phase of retirement is completely different. The focus here is on ensuring that the we can meet our income needs and maintain our desired standard of living throughout our lifetime. Even the risk/return paradigm is different in retirement income planning. Return is measured as the amount that can be withdrawn from our portfolio each year, and the risk is the possibility that our portfolio will be exhausted before the end of our lives.

What major risks do retirees face?

A successful retirement plan must address the risks and uncertainties of retirement, a “stress-test” of sorts. Several of the most prominent risks in retirement include the following:

  • Longevity risk
  • Early death of a partner
  • Rising healthcare costs
  • Increased need for healthcare
  • Expense of long-term care
  • Impact of market volatility
  • Sequence of returns risk
  • Liquidity risk
  • Inflation risk