Managing the Transition from a 401(k) to Retirement
Planning for retirement is a long process. Ideally, from the time you start your first job to your last day of employment, your goal is to build the biggest nest egg possible. Once you decide to hang it up though, life may suddenly transition from the daily grind to days of golf, traveling and anything else you dream of (we are still talking about the ideal situation here).
What about your investments- do they deserve the same transition? Many people I have talked to suggest that their plans include a full shift to bonds or income-related investments once retirement starts. Although these certainly should be a portion of your retirement savings, I believe that most people should also have at least a small portion in equities throughout retirement. Here’s why:
- People are living longer. Your retirement could last 20-30 years or longer. To be able to maintain a sustainable amount of income, you will likely want some exposure to the stock market. Rather than focusing on the amount of time you have before retirement starts, your investing horizon should include a reasonable period of time needed for further growth after you stop working.
- Traditional sources of retirement income are decreasing. Pensions are becoming increasingly rare, and the future of Social Security is in doubt. The common “three-legged stool” (pension, Social Security, and savings), is starting to become a lop-sided equation. This magnifies the need for continuing growth in your retirement savings.
- The effects of inflation. If your portfolio doesn’t keep up with long-term inflation rates, your “safe” investments could actually lose money due to lost purchasing power.
Most people understand that approaching retirement means a gradual transition to more conservative investments. The question is when and by how much. I recommend you carefully consider your savings level and the anticipated income requirements for retirement. We have added a new calculator that can help you simulate how long your savings might last during retirement (go here for our other calculators).
We have also completed our Smart Savings series that talks more about the transition from work to retirement. No matter where you are in life, they are work a look.
As always, if you have any questions regarding this subject or anything else, please let us know.
Kevin Jaegers, Senior Investment Advisor
