You have a unique vision for your retirement. Whatever that vision is, proactive planning is the first step toward helping bring it to life. Unfortunately, more than half of adults feel they’re behind on retirement planning. The truth is, the sooner you start planning and saving for your retirement, the better.
Envisioning your retirement lifestyle
Rather than planning your life around your money, plan your money around your life. The first step in planning for retirement is defining what retirement means to you and answering some important questions. When do you plan to retire? How will you spend your time in retirement? Can you afford long-term care if you need it? Will you need to care for your parents or other loved ones? Are there charities you want to support?
Articulating the retirement you envision helps you set concrete goals and determines how much income you will need in retirement to achieve those goals.
As you map out your road to retirement, it is important to consider the following factors, which could impact your ability to enjoy your current quality of life as you progress through retirement.
Longevity. With advances in medicine and an increased emphasis on wellness, people are living longer, healthier lives. As a result, many people underestimate their lifespan and their risk of outliving their assets. When building your retirement income, allow for the possibility you’ll live longer than you expect.
Market risk.This involves not only the possibility that the market will move against you, but also that it will move against you immediately before or after you retire, and you will have to begin withdrawing assets to meet expenses. However, keep in mind that over the long-term, stocks have outperformed other asset classes and should likely still have a place in your investment strategy.
Inflation. If your assets do not grow as quickly as the inflation rate, you could lose purchasing power. Consider allocating a portion of your retirement portfolio to investments with the potential to outpace inflation.
Asset allocation. This strategy combines various asset classes — such as stocks, bonds, and cash equivalents — into your portfolio to meet your unique risk preferences and return objectives. As you move toward retirement, your asset allocation strategy will generally become more conservative, shifting from equities and growth to fixed income and cash equivalents that provide income and capital preservation.
Rate of withdrawal. Withdrawing too much from your retirement nest egg early on can increase your chances of outliving your assets. Generally, your withdrawal rate should reflect your asset allocation, life expectancy, time of retirement, portfolio value, and tax impact. It may also have to consider current or future required minimum distributions from your retirement account.
Health care costs. For many people approaching retirement, future health care costs are a source of anxiety, especially as medical costs outpace inflation. Historically the cost of healthcare has outpaced inflation, making it one of the large items in most retirees’ budgets. In addition, fewer individuals have employer-sponsored healthcare in retirement, so it’s important to understand how and when to start using Medicare.
An experienced financial advisor can help you define your goals, prepare for your vision of retirement, and make changes as needed along the way. Look for an advisor who will support you every step of the way, from determining your income needs and allocating your investment portfolio to monitoring your plan and adjusting your strategy as your life evolves or priorities change. It’s your retirement; don’t settle for anything less.
This article has been prepared for informational purposes only. The information and data in the article has been obtained from sources outside of Morgan Stanley. Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of the information or data from sources outside of Morgan Stanley. It does not provide individually tailored investment advice and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The strategies and/or investments discussed in this article may not be suitable for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a financial advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.
Jordan Thayer is a financial advisor in Seattle, Wash., at Morgan Stanley Smith Barney LLC. He can be reached by email at jordan.thayer@ms.com or by telephone at (206) 628-4681.
