September 23, 2020

The Three Stages of Retirement Planning

Forty years ago, it was common for Americans to rely solely on pension payments or Social Security to get them through retirement; that is not the case for the majority of retirees today. Much of today’s retirement planning is the responsibility of that individual.

Retirement planning has three stages – the accumulation phase, the planning phase and the distribution phase. The accumulation phase is when one starts setting funds aside for retirement; this phase highlights the power of compounding. As retirement draws near, the focus shifts from saving to planning for retirement and managing volatility. Finally, during the distribution phase, investors start withdrawing funds for retirement income.

How the market performs at the beginning of an individual’s retirement can have a significant impact on a retiree’s portfolio; this is often referred to as sequence of returns risk. This occurs when the market is experiencing a downturn and an individual is taking withdrawals from the portfolio, selling at an inopportune time. Although having a balanced portfolio can help mitigate volatility, not all market risk can be eliminated through diversification; this is called systemic risk. The importance of understanding sequence of returns risk is comprehending how market volatility can impact a sustainable retirement. There are various steps an individual can take to help combat this potential headwind.

The first step is managing portfolio distributions. One of the most daunting tasks when planning for retirement is trying to figure out how much money is enough. Conducting a cash flow analysis helps answer this question. This can be accomplished by identifying the desired lifestyle in retirement and establishing an annual withdrawal rate that will fulfill that need. Setting these boundaries helps prevent withdrawing too much from retirement funds and depleting the source of income.

Longevity and inflation risk are other factors that should be taken into consideration when conducting a cash flow analysis. Longevity risk refers to the chance that investors will outlive the funds they set aside for retirement. Due to increased life expectancy, it is even more important for individuals to ensure they are well on their way to a successful retirement. Industry experts are now telling investors to plan on living as long as 30 years into retirement. As life expectancy increases, the compounding effect of inflation becomes even more prevalent. Inflation risk is the risk that inflation will rise to the point of investment returns declining in purchasing power. Throughout a cash flow analysis, withdrawal rates should be adjusted for inflation over that stated time period.

Reducing risks throughout retirement takes a proactive approach. The road to retirement is long, but it is manageable if broken down into different segments. At the beginning of the process, the focus should be on wealth accumulation by starting to invest early and often. When approaching 10 to 15 years from retirement, it is important to start asking the question, how much money is needed in retirement? Lastly, once in retirement, it is important to continue to monitor asset allocation, spending and current market conditions.

If you have questions about the stage of retirement that applies to you, we encourage you to consult a retirement plan specialist.


Investment management services to individuals, corporations, trusts, endowments and foundations offered through CBIZ Investment Advisory Services, LLC, SEC Registered Investment Adviser. For information about additional service offerings, please see the Form ADV 2A for CBIZ Investment Advisory Services, LLC at adviserinfo.sec.gov.

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