MANAGE. DEFINE. UNDERSTAND.
Your Relationship With Your Finances
Typically, there are three major changes in the relationship with your finances that occur upon retirement:
• Managing your lifestyle change • Defining your attitude about investment risk • Understanding how your savings will be affected
Managing Your Lifestyle Change
“Plans are nothing; planning is everything.” - Dwight D. Eisenhower
You may have a vision of what you think your retirement will be like: spending more time with family, traveling or enjoying a favorite pastime. Maybe you even created a financial plan with these visions in mind. You never really know what life has in store for you. The plans you made need to be living and adaptable to ensure they accommodate the reality of your retirement.
There is no better time than the present to review your retirement plans. It is crucial that your assets are structured to grow and generate needed income, but also remain flexible enough to address the unexpected.
Defining Your Attitude About Investment Risk
When you were in your 30s and 40s, it was easy to have a cavalier attitude about what the stock market was doing. You had two things on your side:
• Time • Steady income from employment
You had time for the market to recover, and you could ride out the ups and downs. It is possible as you near retirement, you no longer have the luxury of time. It is not feasible for you to wait for the economy to bounce back or the stock market to right itself. If you experience a market loss of 20 percent, you might have to learn to live on 20 percent less income for the foreseeable future.
Additionally, if your account were to lose 20 percent, a corresponding 20 percent recovery would not get you back to “whole”. In order to recoup the loss, you would actually need a 25 percent gain.
For example, if you had $100,000 and lost 20 percent, your new balance would be $80,000. If the account grew in the following year by 20 percent, the account balance would be $96,000.
In years past, you probably had a regular income stream. If the need arose, you could set an additional amount aside to help get your savings back on track. While working full time and earning an income, you may have had quite a different attitude about your money. Your biggest income producing asset was yourself! Once that asset stops producing income, your other assets are too important to leave to chance.
Understanding How Your Savings Will Be Affected
Managing income: Structured or self managed
For much of your adult life you might have become accustomed to getting a paycheck twice a month, and paying your bills once a month. This constant and structured flow of money in and money out is something that might be second nature to you.
During retirement, your employment paychecks stop and perhaps your Social Security benefits begin. Any additional income you require will need to be created by you. You can either create a new stream of structured income or try to manage the existing income on your own. Creating regular income from a lump sum of money can be more complicated than it appears.
Every year, your account undergoes changes. The market has gone up or gone down – or some amount of interest has been credited. For some accounts, fees will be taken out to cover expenses and riders. As you examine your statement, you need to decide how much to withdraw to maintain your standard of living for the upcoming year, factoring in taxes and the effects of inflation.
Improvised income can be quite dangerous in retirement. Whether the market is up or down, you will still need income every year. In a down market, these systematic withdrawals will exhaust your savings more quickly.
Typically, people feel much more secure knowing that structured income can create regular, secure income for the rest of their lives.
For, if you had $100,000 and lost 20 percent, your new balance would be $80,000. If the account grew in the
following year by 20 percent, the account balance would be $96,000.