What does an artist and someone planning for his or her later
years have in common? Each visualizes their final objective, but
the process is fluid. Although your situation is unique, there are
basic elements you can use to sketch an effective retirement
Pointers for the Accumulation Phase
An important action you can take is to determine your retirement
needs. This task involves identifying your potential retirement
expenses, as well as estimating the amount you might receive from
each potential source of retirement income (Social Security,
pensions, personal investments, and employment earnings).
Doing this calculation will give you an idea of how much you may
need to finance a comfortable retirement. Don't be surprised if the
numbers add up to a large sum -- after all, this money may need to
support you for 20 or 30 years. Fortunately, there are ways to
leverage your dollars.
Starting early and contributing as much as possible to
employer-sponsored retirement plans and IRAs may help you to
potentially accumulate more money. Why? Because investing in these
tax-advantaged accounts means your money will work harder for you.
The longer the money sits untouched, the more it can potentially
Another vital step: Determine an appropriate asset allocation --
how you divide your money among stocks, bonds, and cash -- for your
portfolio. This should be based on your financial goals, tolerance
for investment risk, and time horizon. Be aware that your asset
allocation will need to be adjusted periodically in response to
major market moves or life changes. Also remember that asset
allocation does not assure a profit or prevent a loss.
Once you're nearing retirement, it will also be necessary to
craft a solid plan for distribution of your assets. For example, do
you know one of the greatest risks that retirees face? It's the
possibility of outliving their money, according to the Society of
That's why it's essential to determine an appropriate annual
withdrawal rate. This amount will be based on your overall assets,
the estimated length of your retirement, an assumed annual rate of
inflation, and how much your investments might earn each year.
Another consideration: After age 72, you'll have to begin making
an annual withdrawal from some tax-deferred retirement accounts
(known as a required minimum distribution, or RMD), including
traditional IRAs. Preparing for this phase ahead of time may help
reduce your tax burden -- especially if your annual RMD may push
you into a higher tax bracket.
Likewise, this is the time to make sure your final wishes are
accurately documented and estate strategies are well underway to
minimize your heirs' tax burden. As you can see, planning for the
different phases of retirement is a lifelong process. Following is
a list that can help you along the way.
Retirement Planning Checklist
Find the category that best describes you. After answering the
questions, bring the list to a qualified financial professional who
can help make sure your retirement plan is on target.
Saving for Retirement
- Have you performed a comprehensive retirement needs
- Are you contributing enough to potentially reach your financial
goal within your desired time frame, by maximizing contributions to
tax-advantaged retirement accounts, such as your employer-sponsored
retirement plan and an IRA?
- Is your asset allocation aligned with your retirement goal,
risk tolerance, and time horizon?
- Have you determined if you might benefit from contributing to a
traditional IRA or a Roth IRA?
- Do you review your retirement portfolio each year and rebalance
your asset allocation if necessary?
- Do you know the payout options available to you (e.g., annuity
or lump sum) with your employer-sponsored retirement account, and
have you reviewed the pros and cons of each option?
- Have you considered your health insurance options, (i.e.,
Medicare and various Medigap supplemental plans or
employer-sponsored health insurance), out-of-pocket medical
expenses, and other related health care costs?
- Have you contacted Social Security to make sure your benefit
statement and relevant personal information are accurate?
- Should you purchase long-term care insurance? If so, have you
investigated which benefits are desirable?
- Is your asset allocation properly adjusted to reflect your need
to begin drawing income from your portfolio soon?
- Have you determined an appropriate withdrawal rate of your
assets to help ensure that your retirement money might last 20, 30,
or more years?
- Have you figured the amount of your annual RMD and developed a
strategy to reduce your tax burden once you're required to begin
- Have you appointed a health care proxy and durable power of
attorney to take charge of your health and financial affairs if you
are unable to do so?
- Have you reviewed all your financial and legal documents to
make sure beneficiaries are up-to-date?
- Are you making effective use of estate planning tools (such as
trusts or a gifting strategy) that could reduce your taxable estate
and pass along more assets to your heirs while also benefiting you