Asset allocation and diversification are methods used to help manage investment risk; they do not guarantee a profit or protect against investment loss.
You’ve worked hard your whole life anticipating the day you could finally retire. Congratulations — that day has arrived! But with it comes the realization that you’ll need to carefully manage your assets to give them lasting potential.
Review your portfolio regularly
Traditional wisdom holds that retirees should value the safety of their principal above all else. For this reason, you may assume your investment portfolio should be shifted to all fixed-income investments, such as bonds and money market accounts. The problem with this approach is that you’ll effectively lose purchasing power if the return on your investments doesn’t keep up with inflation.
While generally it makes sense for your portfolio to become progressively more conservative as you grow older, it may be wise to consider maintaining at least a portion of your portfolio in growth investments.
Don’t assume that you’ll be able to live on the earnings generated by your investment portfolio and retirement accounts for the rest of your life. At some point, you’ll probably have to start drawing on the principal. But you’ll want to be careful not to spend too much too soon. This can be a great temptation, particularly early in retirement.
A good guideline is to make sure your annual withdrawal rate isn’t greater than 4% to 6% of your portfolio. (The appropriate percentage for you will depend on a number of factors, including the length of your payout period and your portfolio’s asset allocation.) Remember that if you whittle away your principal too quickly, you may not be able to earn enough on the remaining principal to carry you through the later years.
Understand your retirement plan distribution options
Most traditional pension plans pay benefits in the form of an annuity. If you’re married, you generally must choose between a higher retirement benefit paid over your lifetime, or a smaller benefit that continues to your spouse after your death. A financial professional can help you with this difficult, but important, decision.
Historically, other employer retirement plans, such as 401(k)s, typically haven’t offered annuities; however, this may change as a result of legislation passed in 2019 that makes it easier for employers to offer such products. If your plan offers an annuity as a distribution option, you may want to consider how it might fit in your long-term plan.
You might also consider whether it makes sense to roll your employer retirement account into a traditional IRA, which typically has flexible withdrawal options. If you decide to work for another employer, you might also be able to transfer assets you’ve accumulated to your new employer’s plan, if allowed.1
Finally, you may also choose to take a lump-sum distribution from your work-based retirement plan; however, this could incur a substantial tax obligation and a possible 10% penalty on the tax-deferred portion of the amount if you are under age 59½, unless an exception applies.
Plan for required distributions
Keep in mind that you must generally begin taking required minimum distributions (RMDs) from employer retirement plans and traditional IRAs after you reach age 72, whether you need them or not.2
If you own a Roth IRA, you aren’t required to take any distributions during your lifetime. Your funds can continue to grow tax deferred, and qualified distributions will be tax free.3 Because of these unique tax benefits, it may make sense to withdraw funds from a Roth IRA last.
Know your Social Security options
You’ll need to decide when to start receiving your Social Security retirement benefits. At normal retirement age (which varies from 66 to 67, depending on the year you were born), you can
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