The massive baby boomer generation is retiring and preparing to retire by the millions. According to The AARP 8,000 people turn 65 every day in this country. The biggest generation might be ready to retire physically, psychologically, and chronologically, but many are not financially.
I am not talking about the normal conversation of having enough money to retire and that you need to save more to live better in later years. This discussion is much more about the proper use of the money that you already have saved for retirement and beyond. There are four phases of wealth in a financial life that every investor and saver must recognize and use to their advantage. Those phases are:
- The Accumulation Phase
- Pre Retirement (a.k.a. Retirement Danger Zone)
- Retirement Phase
- Legacy Phase
Each of the wealth phases requires your money be distributed and redistributed accordingly. As I work with clients from all over the country to map out their own personal wealth strategy the first step is educating the client about these phases.
The accumulation phase usually begins at the age of about 25 or whenever you begin your full time profession, be it a job or launching a business. This is when you start putting money away for retirement in a financial vehicle. The most common account to begin to save and invest is a 401k and other types of qualified plans. In this account most people invest in mutual funds that are mostly tied into the stock market and its ups and downs. There are other options available to invest and save money that might be a better fit depending on your financial philosophy. This article is less about what you decide to invest in as it is when you decide to invest in different products. If you are seeking an alternative to the standard 401k or IRA route read this previous article.
During the accumulation phase you can take losses much easier and have time to recover. Dollar cost averaging is your friend and not your enemy at this point. You can take reasonable risks and might consider more aggressive funds, stock, and bonds. You should also consider investing in a couple solid real estate investments with some of your savings. You can use a self directed IRA to own real estate and other non traditional assets inside of your retirement accounts. This phase is the time to take a shot at bigger returns and be able to handle some reasonable downsides from time to time. This first phase will go until ten years before your desired retirement age. If you are intending to retire at sixty five your pre-retirement or retirement danger zone begins at age fifty five.
Pre-retirement is when you begin to reassess your risk tolerance and start to realize that any losses might dramatically affect your ability to retire at your scheduled age of sixty five. Now you begin to shift the bulk of your retirement money to very save stable low risk assets. This will mean getting most of your money out of the ups and downs of the stock market. If you choose to leave funds in the market it should be no more than 30% of your asset base and that 30% should be in low risk solid blue chip portfolios. You also might consider either selling off your real estate holdings or using some cash to pay off existing mortgages and loans giving you great cash flow and removing most of your downside risk. If real estate values drop dramatically it hurts much more if you are leveraged with big mortgages. When you own the real estate free and clear they are still great cash flow machines even if the values drop.
You should also consider taking a portion of your cash and purchasing a solid, low fee, fixed indexed annuity. which will give you time for it to grow before you actually retiree and start drawing the lifetime income from the annuity. These steps will maximize your income potential when you retire while maintaining your nest egg that you have worked hard to accumulate over the last 30 years of your life.
Retirement is now upon you( in this example at age sixty five) and you decide to leave your profession and retire from that paycheck. Now risk and loss are the enemy and most of your funds should be in guaranteed products. There is a myth that guarantees and low risk mean lousy rates of return. This is not always the case and it will pay you to take the time to find low or no risk alternatives to mutual funds. If you choose to keep most of your funds in mutual funds during this phase now you are subject to the ravages of reverse dollar cost averaging that can gobble up retirement money in a hurry. (more on this here)
Retirement is all about hands off income that you have been able to create from several sources. These include social security, any pension you may be entitled to draw upon, 401K and IRA funds, cash value life insurance, free and clear real estate, fixed indexed annuities with lifetime income riders attached, CD’s and standard savings. This could also include payments from businesses or assets you may have sold when you retired. Creating income from all these assets will make sure you can live in style for the next 30 years and beyond. During this time of our lives we should also plan out a long term care or home health care strategy. If we leave this last detail without a plan it could end up costing is most of our retirement assets and leave much less behind for the people and causes we love.
The last phase is your legacy phase, which represents what you would like to leave behind for family, charities, foundations, and other causes near and dear to your heart. This legacy is what is left after we have passed away. Many people have different opinions on this phase. Most people do want to leave behind a nice nest egg to help with education and other expenses by your children and grandchildren. Other people say they started with nothing and want to leave little to nothing behind after they are gone. One of the ways to leave behind a fantastic legacy is to set up a properly designed life insurance policy during your younger days. It will be a tax free retirement asset during your lifetime and leave behind tax free cash for your heirs.
The question to be asked is what do I want to accomplish even after I am gone? Then set up a legacy plan with a good estate attorney to make sure your wishes are carried out with your money after you’re gone. If you master these 4 wealth phases you will be assured a life of financial abundance.