This article is the third in a series on funding life in retirement.
Investors face a multitude of complex issues and important decisions as they enter the distribution phase of retirement. For financial advisors, assisting clients with these challenges means helping them to achieve an optimized retirement plan, one that manages risk and is customized to their unique needs.
Starting simple by saving
When financial planning for retirement and the post-career life, there is one guideline that is familiar to us all: build a retirement savings. Financial advisors often refer to this as a client’s accumulation phase. For many investors, the vehicle used for travelling along the roadway of accumulation is a defined contribution plan – a type of retirement plan in which an employee, employer, or both, make contributions on a regular basis. The 401(k) is a well-known example of a defined contribution plan.1 No matter what our particular savings vehicle is, we would all do well to heed the simple, age-old advice that a penny saved is a penny earned.
Now for the hard part: A new set of risks
The distribution phase of retirement – the time when an investor starts to utilize their savings and begin their post-career life – is uniquely different from accumulation. All investments involve risk of loss, but for retirees, this is compounded by the fact that they no longer earn regular income from employment. Moreover, there are retirement-specific risks that are important to consider. Among them are longevity, inflation, and sequence of returns.
Longevity risk is the risk that an investor will live longer than expected and exhaust their retirement savings. The risk of inflation – or a general increase in the price of goods and services – has the potential to cause the spending power of an investor’s retirement assets to decrease over time. Lastly, sequence of return risks could result in an investment account or accounts not performing to a level that will provide the amount of income required by an investor.
Nothing fits like a custom fit
Saving for retirement is straightforward – we should all save as much as we can. Planning for retirement distribution is more complex. Every investor has spending needs and long-term financial goals that are unique to them. Moreover, an investor’s post-career financial life has the potential to incur a new set of risks that are specific to the realm of retirement.
Financial advisors have an opportunity to add value to clients by helping them to create a optimized retirement income plan, designed specifically for their individual financial circumstances and lifestyle preferences. An optimized retirement is one in which an investor can feel confident, knowing that their plan is uniquely crafted to help achieve their personal vision of a rewarding post-career life.The Five Principles of Inspired Retirement - An Innovative Framework for an Authentic Need , provides more information on retirement planning. For additional information, watch Ed Farrington, Executive Vice President of Retirement, discuss the challenges advisors and their clients face as they work to achieve retirement security.
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1 A 401(k) Plan is a defined contribution plan where an employee can make contributions from his or her paycheck either before or after-tax, depending on the options offered in the plan. The contributions go into a 401(k) account, with the employee often choosing the investments based on options provided under the plan
This material is provided for informational purposes only and should not be construed as investment advice. The views and opinions expressed above may change based on market and other conditions. There can be no assurance that developments will transpire as forecasted.
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