If you’re nearing retirement, you’re probably looking forward to a more relaxed pace of life with more choices in your lifestyle. You may keep on working at a job you enjoy, cut back your hours, travel the world or stay active as a volunteer — provided you have the financial ability to support the next chapter in your life.
In the past, many retirees were able to put their financial planning on autopilot, purchasing conservative, income-generating assets like bonds. But in today’s low interest rate environment, that approach may not produce enough income to support your desired lifestyle. At the same time, the financial markets have become more volatile.
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When interest rates are low for a long period, many “conservative” investors who need or want income make the mistake of taking on significantly higher risk hoping to improve their potential returns. Of course, while these higher-risk assets are in positive territory, those investors feel comfortable. But when the market cycle ends, as every cycle does, many investors panic and sell at the wrong time.
Perhaps even more important, retirement lifestyles have become more flexible. You may want to work part time for a year or two, or spend a year traveling. You might also be faced with a serious health problem that impacts your savings and investments. The death of a spouse or partner, a remarriage or new relationship, and the arrival of grandchildren can all affect your retirement income, assets and estate planning.
Therefore, you need to play an active role in managing your investments in retirement, working closely with your financial advisor and engaging legal and accounting professionals as necessary. That lets you respond appropriately to a wide range of possibilities that can occur in retirement, while putting your estate plans in place.
On the positive side of retirement finances, you may receive an inheritance from an older family member, or funds from a life insurance policy. Those additional assets may give you more options for your retirement lifestyle. If you marry late in life or move in with a partner, your household income may go up without a corresponding increase in your monthly expenses.
On the negative side, a medical condition like cancer, a stroke or Alzheimer’s disease can lead to costly medical bills or the need for some type of expensive long-term care.
Ironically, good health is another risk to your retirement savings. If you live longer than expected, your accumulated assets may run out while you are still facing those monthly bills.
Inflation is another risk to consider in retirement. While it can be comforting to know that your investments will generate a certain level of monthly income, you also need to consider your buying power. Inflated food and gas prices, for instance, can take a larger share of a fixed monthly income, leaving you with fewer dollars for other needs.
Insurance premiums can also rise during retirement. With a homeowner’s policy, you might be faced with the difficult choice of paying more each year or reducing your coverage, leaving you vulnerable to a windstorm, flooding, fire or other hazard. Life insurance policies can also cost more, although they can also play a role in your estate planning.
Tax issues are likely to affect your financial decisions in retirement. If you are working in your mid-60s, you may want to postpone getting your Social Security checks until your income falls to a lower tax bracket. If you have investments in a 401(k), 403(b) IRA, SEP-IRA or other qualified retirement account, you will need to start withdrawing those funds, based on federal guidelines. If you have other types of investments as well, you should talk with your financial advisor about a tax-efficient withdrawal strategy.
Speaking of withdrawals, many retirees adopt a “draw-down” strategy, selling a small percentage of their assets every year to generate cash. Here’s another area where active management makes sense, rather than relying on a strict formula like 3 or 4 percent per year, as your need for funds can change from one year to another.
In summary, the financial markets offer both challenges and opportunities to retirees, as they do for investors of all ages. Stay engaged with your investments, talk regularly with your advisors and maintain a flexible mind-set when planning for the future.
Andrew Menachem, CIMA®, is a Wealth Adviser at The Menachem Group at Morgan Stanley in Aventura. Views expressed are those of the author, not necessarily Morgan Stanley, and are not a solicitation to buy or sell any security. The strategies and/or investments referenced may not be suitable for all investors. Morgan Stanley Smith Barney, LLC, member SIPC. Follow Menachem on Twitter @AMenachemMS.