KEY TAKEAWAYS:

• Economic shifts and life events can change the way you plan for retirement.
• It’s important to know the difference between accumulation and decumulation when preparing to retire. 
• Be aware of key factors to consider when creating a retirement spending plan. 

If you are like many people, when you first started saving for retirement you probably had a vague idea of what life might be like when your career days are over. Perhaps you imagined finally getting to take that big international vacation, or envisioned time to work on your golf or tennis game, or spending more time with family and friends. You may not have thought at all about what you would do, instead focusing on a target savings amount or age at which you’d like to retire. During the busy days of working, buying a home, building a family, it’s easy to be consumed by day-to-day demands, even if you are diligent about retirement saving and investing. 

However, individual life events — a major career change, a return to school for an advanced degree, illness, or family changes like creating a multi-generational household, or losing a partner — as well as collective experiences like market fluctuations or the global Covid19 pandemic, can force us to re-focus on our plans for the future, and how to prepare for them now. If you can begin to think about retirement as a stage of life that may include many different phases, you can begin to explore what each phase might look like for you and plan for all that will require.

For many approaching retirement age there are many factors which can lead to feeling less prepared or overwhelmed. In fact, according to a 2021 Federal Reserve survey, the closer an adult was to retirement the less secure they felt that the amount saved would be adequate to meet their retirement needs. If this is how you feel, you are not alone. Regardless of whether you are on track with your saving and investing, trying to catch up, or developing a plan to diversify your assets, there is often a gap in understanding how your approach to retirement saving and planning may change at different phases of your working life and as you move closer to your retirement age. Even if you feel relatively comfortable with where you are in your retirement planning, staying open to new information and seeking guidance on an ongoing basis can help you feel even more confident that you’ll be able to maintain your lifestyle now, and all the way through your retirement years.

Accumulation and decumulation

For everyone planning for retirement there are two major phases: accumulation and decumulation. Accumulation is more familiar to most: this defines your working life as you are saving and investing for retirement, as well as acquiring assets such as property. Defined benefit plans like pensions, defined contribution plans like 401(k)s, as well as stocks, bonds and annuities are examples of the products by which the wealth that will support you during your retirement is accumulated.

When you are in your accumulation phase you are thinking for the long-term and the earlier you begin the better. This long-term mindset means investment strategies can tolerate a higher degree of risk. Markets may fluctuate up or down, but since 401(k)s, mutual funds, and index funds employ the strategy of "dollar-cost averaging" or buying in fixed automatic amounts the potential gains over long periods can potentially outweigh short-term losses. These types of investments and savings plans also offer tax incentives which can help enhance the ability to save or to pay down debt. Asset allocation does not guarantee a profit or protection against loss in a declining market. Past investment and market performance does not guarantee future results.

The second phase, decumulation, may be less familiar. Decumulation refers to the process of converting assets and retirement savings into actual income once you are retired. Essentially this is the shift from saving to spending. 

• When will you begin to draw from social security, claim pensions, and/or draw down 401(k)s or IRAs?
• Will you make any changes in terms of your living situation? You may choose to sell a larger home and downsize, or you may wish to rent out one property and live in what had formerly been a vacation home.
• Should you change your investment strategy? While in the accumulation phase it is possible to ignore short term market fluctuations, yet in the decumulation phase you may wish to shift your allocation of investments to a more conservative approach. Different situations will require an individualized approach and a financial professional will help you.
• Do you plan to work for additional income during your retirement?

A trusted financial professional can be an invaluable guide in navigating these questions and helping you to examine all the possible considerations for both the accumulation and decumulation phases of your retirement journey. 

Spending plan (your retirement budget)

While you’re thinking about strategy, you’ll also want to develop a comprehensive spending plan that includes all the necessary expenses to maintain your ideal lifestyle. Once you’ve established the necessities, you can spend time thinking about the priority experiences you want to fund — this is where that dream vacation, or passion project, or move to a warmer climate might come in. Lastly, you will need to plan for the additional income that may be needed to support healthcare as well as different types of long-term care. 

While a spending plan like this is at its core a breakdown of numbers, in a much bigger way it establishes values, goals, and a vision for what the retirement phase of your life will look like. By necessity this planning will include the opportunity for imagination and creativity, and will also likely involve difficult conversations, such as planning for potential illness or the death of a partner or spouse. Having a trusted financial professional with extensive experience who knows you well can be an important asset in navigating these complex conversations. Additionally, they can provide perspective and resources that can help you make the most informed and strategically beneficial decisions.

Inflation and longevity

Beyond your individual needs and goals, some future considerations for your spending plan that will impact your retirement investment strategy are the effects of inflation and increased longevity. Inflation is likely already on your radar, as recent years’ record breaking increases in consumer prices took them to a 40 year high. Longevity too may be on your mind. Many people who are looking toward their own retirement have spent time caring for aging parents who may have lived to 90 or later — you may currently be in that position. With that experience you may be aware of the risks of outliving ones’ savings due to the need for more expensive or prolonged care than originally foreseen. 

Both inflation and increased longevity may cause you to think about modifying your retirement plans. You may decide to continue working longer in your existing career, or perhaps to shift to part-time work, self-employment, or work at a non-profit or charity you care about. With these decisions you will likely want guidance on how and when you file for Social Security and how any additional income can be invested wisely to further support your retirement.

Retirement can have many phases

A longer lifespan offers additional opportunities for thinking about your retirement life in phases. There may be a phase that involves different types of work, either to generate income or by volunteering to give back to your community. If travel is a priority, you may consider the timing of more adventurous trips versus those that are more relaxing to coincide with your likely tolerance for different degrees of activity in earlier years versus later ones. You may choose to stay in your current home, or keep it as a rental property while you downsize, or move to a warmer climate, or to be closer to children and grandchildren. Even passing on your estate can be done in strategic ways that can support you in retirement as well as benefit your heirs and legacy. 

While it is clear there are many facets to explore and strategies to consider as you move closer to your retirement, with thought, foresight, and ideally experienced guidance from a financial professional, the process of planning can be meaningful, reassuring and galvanizing. Thinking through possible difficulties and planning for them can be an empowering way of preparing for the future. At the same time, those considerations strengthen the foundation that will allow you to also live out the dreams you have for this next phase of life. If you are ready to take control of building the retirement that can support you in the future, your financial professional can help you every step of the way. If you are not already working with a financial professional, now could be a good time to seek one out. Either way, there are many other resources available to support you in your own unique journey.