The word “Retirement” often invokes images of taking long trips, sleeping in, and working on those projects that were put off during the busy working years. In reality, flipping the switch from work mode to retirement mode is not quite as easy and seamless as most imagine. One of the biggest challenges in this transition is how to best position ones investment accounts both before and during this transition.
The first step in preparing for the “Golden Years” is to actually change the way we think about retirement. We are geared to think of retirement in terms of the way it was defined 100 years ago. Work to age 62 (never mind that life expectancies were 65). If lucky enough to live to retire, our health probably would not allow us much of a retirement. Nowadays, once one reaches age 65, their life expectancy is age 82 or another 17 years. That leaves a lot of years to plan for.
In reality retirement is a three phased process. The first phase occurs between 50 and 61 when the kids leave and our focus becomes wealth accumulation. At this time we concentrate on building the nest egg, paying off education bills, and thinking about where and how we wish to live the last third of our life. Our investment focus is growth oriented and a large portion of our portfolio will be in equities.
The next phase extends from age 62 to 75. Real change begins, as we leave the work life behind. This is probably the most misunderstood phase of retirement, because to retire does not simply mean quitting work. It is more about the choices we make for the use of our time.
A study done by the Gallup organization found that 60% of retirees want to become entrepreneurs or to seek a new job to fulfill their dreams, 10% are seeking a new work-life balance, 15% hope to enjoy a traditional retirement and the remaining 15% do not want to retire. Clearly this phase is not about quitting work. Instead it is more like having the financial freedom to do what we want, without having the economics of the endeavor as the chief motivating factor.
From an investment perspective, those who continue to work and earn, at whatever they choose to do, are continuing to build human capital and can afford to take more risk with their investments. Their portfolios should reflect a bias toward equity or growth investments, consistent with their willingness to accept investment risk. As their production of human capital tapers off, and the needs to depend upon investments for support increases, this more risky strategy should begin to give way to less risky investments.
The third and final phase of retirement begins about age 75. Now, health concerns manifest themselves, and we cut down on expensive travel and recreation that we pursued with such abandon 10 years before. The option of generating human capital has all but disappeared, and with it so should the risk in our portfolio. This does not mean that we throw out all stocks in favor of bonds but rather that we begin to take a more cautious approach to investing with preservation of capital as the key.
At Wealth Management Associates we are well versed in retirement income planning and welcome any questions you have regarding how to best position yourself and your assets for the golden years ahead.