In the world of financial planning, there are four common stages of an investor’s lifecycle.
- Planning
- Accumulation
- Distribution
- Legacy
In the planning phase, you’re considering the investment products and processes to save for the future and committing to a financial strategy that gives you the greatest chance of achieving long-term goals. The goal is to ensure short-term financial needs are covered while maximizing potential for growth.
In the accumulation phase, you’re focused on saving and growing. You’re maximizing earning potential, managing spending, and ensuring your portfolio is appropriately invested for long-term growth. We spend most of our lifetimes (35-40 years) in this stage.
During the distribution phase, you’re tapping into those hard-earned savings to maintain a steady income during retirement. If planned appropriately, you should feel confident that you won’t outlive your money and that resources exist to accommodate special situations and unexpected expenses like healthcare costs and assisted living facilities.
In your final years, financial planning is focused on passing assets onto your heirs in the most constructive, tax-efficient ways possible. Although thorough estate planning should happen long before this stage, changes may take place during the legacy phase to accelerate gifts to family, make charitable contributions, or clearly communicate your plans to loved ones.
According to the Federal Reserve Bank of St. Louis, 10,000 people will retire per day on average until 2029. As these investors leave the accumulation phase and enter distribution, there’s a common fear that they’ll lose the principal they invested in the financial markets. However, the greater risk is running out of money. Ensuring you don’t outlive your money and can maintain a desired quality of life during retirement requires planning for:
- Longevity: Remember that average life expectancies are just that – averages – and many people go years beyond them. You could end up spending 30 years in retirement, which is almost as many as spent in the workforce.
- Inflation: The cost of goods and services increases over time to the tune of about 3% as a long-term average. That can eat into your cash flow if not planned for, so it’s important to use portfolio strategies that protection against inflation.
- Interest rates: Rates vary over time and can be particularly impactful when rates are low on short- and long-term fixed income vehicles. Retirees generate less income than what’s needed for spending, and money that comes due is rolled over and re-invested at lower rates.
As investors planning for or nearing retirement, it’s important to remember that a risk greater than losing your principal investment in the markets is running out of money or having to significantly change your quality of life during retirement. Create a plan for your money to continue growing during your golden years – because you’ve worked too long not to enjoy your hard-earned rewards.