With retirement fast approaching, your retirement strategy may need to reflect the changes that are coming. As you move from saving for retirement to taking retirement income, you may want to consider how to ready yourself for this new phase.
The approach to retirement can involve changes that require you to evolve your thinking around investments and portfolio construction. Here are some of those strategic changes you may need to consider.
Dollar-Cost Averaging
A fundamental investment principle that may have been well-suited for retirement accumulation works in reverse when it is used as a method for withdrawing income from your retirement portfolio. When you sell shares periodically to fund retirement income, you may sell more shares when the price is lower, leaving you fewer shares to participate in any future market activity. This can impact the sustainability of your retirement assets.
Sequence of Returns Risk
Sharp drops in market prices in the accumulation phase are unsettling, but history has shown that markets recover over time. However, past performance is no guarantee of future results. Market declines, in combination with income withdrawals, can accelerate the depletion of your retirement portfolio since the assets sold to provide retirement income won't be there to participate in future market activity.
Maintaining a cash reserve to fund your income needs is one strategy that may help mitigate sequence of returns risk.
Develop an Income Strategy
Diversification still matters, but the focus shifts to the best strategy for drawing income from your retirement accounts. You will need to determine which of the withdrawal strategies best fits your circumstances, the appropriate withdrawal amount, and even what accounts to withdraw from and when.
For many individuals, having a consistent source of lifetime income to meet the cost of essential living expenses becomes more important.
