MANAGING SAVINGS AND INCOME THROUGH THE CIRCUMSTANCES OF YOUR LIFE
A variety of factors determine the life you will live when you leave your career. You can foresee travel and the hobbies you'll pursue, but unfortunately you can't know with certainty the future performance of the financial markets or the direction of tax rates. However, there are ways you can gain the flexibility to meet the specific needs of your retirement. One is to hold accounts with different tax structures and another is to adjust your drawdown strategy based on market returns.
Your financial needs will depend largely on what you want to do in retirement. But making this determination before you've actually retired can be difficult. This is especially true now that people routinely live well into their 80s or beyond and experience retirements that last 30 years or more. "Planning for that length of time can feel unmanageable," says Christine Fahlund, CFP®, a senior financial planner with T. Rowe Price. "Instead, break your retirement into segments. This makes it easier to think about and plan for the future—and almost always makes better financial sense, too."
YOUR VISION FOR RETIREMENT
Think of your retirement as three life stages defined by age-specific goals and needs:
Stage 1 is likely when you're hoping to enjoy retirement most actively. You might decide to continue to work full or part time in these years while trying out Practice Retirement® strategies. During this time, you can refine a vision for your later years by exploring different hobbies and activities. The idea is to discover new passions and discard those that turn out to be less fulfilling than you anticipated. Working even part-time can increase your financial flexibility both now and in the future. You might decide to stop contributing to retirement accounts, for instance, using those assets instead to pay off your mortgage without dipping into your investments. The added cash flow from ongoing employment also can enable you to better handle unexpected events, such as a drop in the market. "Practice Retirement can afford you the freedom to play, make mistakes, and prepare for the future with a minimum of worry," says Fahlund.
Stage 2 may be when you complete your separation from work and try full retirement. You can begin drawing down your savings and fully pursue the goals you refined while exploring your future retirement. Even so, it can be hard to plan for this period of life, since your personal circumstances may determine many of your activities. Regardless of your situation, you can expect to see the results of having worked beyond the traditional retirement age of 65: You likely will have a larger nest egg—and you also may draw greater income by having deferred Social Security benefits or by having decreased your expenses by paying off your mortgage.
Stage 3 is the new frontier of retirement planning. If both members of a couple reach age 65 , there is a 36% chance that one partner will live to age 95, according to the Society of Actuaries. "We're facing a double challenge," says Fahlund. "Not only are we living longer, but very few of us are going to have pensions to help along the way." Your potential longevity makes it more critical than ever that you develop a plan early to draw down your retirement accounts strategically and create financial flexibility.