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Preparing a Plan to Go (and Grow) in Retirement

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Retirement is constantly being redefined via phrases like “60 is the new 50” and “70 is the new 60.” The truth is that we are living longer, healthier and more active lives. That truth means we will need to be more aware of our finances in our golden years (60 to 100). Don’t be a fool and run out of money in retirement. Consider working a bit longer or spending a bit less if that is what is needed.

Sometime before you head into retirement, you should start to visualize what wealth management means, as you have likely been focused on wealth accumulation. You should work with a Certified Financial Planner™ (CFP®) practitioner on this exercise as well as potentially starting to work it out in your own head.

Because of our increased longevity, retirees now have a greater stress on the sustainability of their retirement assets. There is no easy answer to this challenge, but let’s begin by discussing two approaches to building your retirement plan. The two basic goals are matching expenses to investments and matching investments to time spans of your life. The statements below are not guidelines but rather an introduction to these approaches to wealth management in retirement.

Write Down Expenses, Goals and Costs

With this approach, you segment your retirement expenses into three buckets, wheelbarrows, tranches, categories or whatever:

  • Basic living expenses—food, rent, utilities, etc.
  • Discretionary expenses—vacations, dining out, etc.
  • Legacy expenses—assets for heirs and charities

Writing down costs and goals is something a CFP® practitioner can help you with, but it is also good for you and your loved one to start visualizing these issues on your own. You might want to start by pairing appropriate income or investments to each category. For instance, Social Security or other “safer” sources of income might be assigned to basic living expenses. If this source of income falls short, you could consider cutting back on the other categories to help fill the gap. With this approach, you are attempting to match income sources to essential expenses.

For discretionary expenses, you might consider investing in top-rated bonds and large-cap stocks that offer the potential for growth and have a long-term history of paying a steady dividend. The thought here is that you want more growth exposure to discretionary items versus the security needed for the basic-living category. Finally, if you have assets you expect to pass on, you might position some of them in more growth investments, such as small-cap stocks and international equity.

Growth investments carry additional risks, which include differences in financial reporting standards, currency exchange rates, political risk unique to a specific country, foreign taxes and regulations, and the potential for illiquid markets. These factors may result in greater share-price volatility and cause investors to be fearful.

“Don’t be a fool and run out of money in retirement. Consider working a bit longer or spending a bit less.”

Explanation of the Time Frame Bucket Strategy

This approach creates buckets based on different time frames and assigns investments to each. For example:

  • 1–5 years: This category funds your near-term expenses. It may be filled with cash and cash alternatives, such as money market accounts. Money market funds seek to preserve the value of your investment at $1.00 a share. They are considered low-risk securities, but they are not backed by any government institution, so it’s possible to lose money, although extremely rare historically. Money market mutual funds are sold by prospectus. Read it carefully before you invest.
  • 6­­–10 years: This category is designed to help replenish the funds in the “1–5 years” bucket. Investments might include a diversified, intermediate, top-rated bond portfolio. Diversification is an approach to help manage investment risk. It does not eliminate the risk of loss if security prices decline.
  • 11–20 years: This category may be filled with investments such as large-cap stocks that offer the potential for growth.
  • 21+ years: This category should be discussed with your CFP® practitioner, as it might include longer-term investments such as small-cap and international stocks. This area likely would have the most volatility and may not be appropriate for all investors.

Each category is set up to be replenished by the next longer-term bucket. These numbers would likely change based on health and other factors. This approach can offer flexibility to provide replenishment at more opportune times. For example, if stock prices move higher, you might consider replenishing the “6–10 years” category even though it’s not quite time.

A tiered approach to pursue your income needs is not the only way to build an income strategy, but it’s one strategy to consider as you prepare for retirement. We prefer the 3-5-7 plan developed by Chad Burton, CFP®. For more information, see the webinars in the Resources section of our website.

Disclaimer: Consult your tax advisor before taking any action on topics discussed in the blog.

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This blog is provided by NewFocus Financial Group, LLC (“NewFocus” or the “Firm”) for informational purposes only. Investing involves the risk of loss and investors should be prepared to bear potential losses. No portion of this blog is to be construed as a solicitation to buy or sell a security or the provision of personalized investment, tax or legal advice. Certain information contained in this presentation is derived from sources that NewFocus believes to be reliable; however, the Firm does not guarantee the accuracy or timeliness of such information and assumes no liability for any resulting damages.

NewFocus is an SEC registered investment adviser owned by Chad Burton and Robert Black which maintains a principal place of business in the State of Washington. The Firm may only transact business in those states in which it is notice filed or qualifies for a corresponding exemption from such requirements. For information about NewFocus' registration status and business operations, please consult the Firm's Form ADV disclosure documents, the most recent versions of which are available on the SEC's Investment Adviser Public Disclosure website at www.adviserinfo.sec.gov.