Some people plan extensively for retirement, worrying about it obsessively. Others sort of slide into it, apparently assuming things will take care of themselves. Either approach can work, and either one can blow up in your face. I think a middle course is more likely to produce the result you desire.
Let's look at nine important retirement decisions, each of which can have a big impact on the quality of your "golden years" as well as what you have left over to leave to your heirs.
1. Can you afford to retire now? In other words, do you have enough savings to meet your needs for the rest of your life?
When I was an advisor, I often encountered couples on the brink of retirement who couldn't really answer this question because they had not seriously discussed their future expenses. I found it uncomfortable (although part of what they paid me for) when I had to tell them they would be taking a big risk to retire with the savings they had.
It is very common for new retirees to underestimate what they will need to live on, and at least half of the time their projected budgets fail to take taxes into account.
Here is some recommended reading on this topic.
2. How much of your portfolio will be in equities? Too much, and you will lose sleep while putting yourself in danger of running out of money; too little, and your investments could fail to keep up with inflation.
I have often talked to new retirees who want to drastically reduce their exposure to risk and put most of their money in bonds, CDs and other things regarded as havens of safety.
Because I favor a moderate approach to many investment questions, I believe that most retirees will not go too far wrong if equities make up somewhere between 40% and 60% their portfolios.
To help in making your own determination, here's a good article on this important topic .
3. How will you diversify the equities in your portfolio? As my regular readers know, I'm a great fan of diversification. Within the asset classes that have long histories of beating the S&P 500, my view is that more diversification is almost always better.
Understandably, many people desire more simplicity in their financial lives after they retire. However, simplicity can come with a cost. In a detailed study of hypothetical retirement distributions going back to 1970s, I found that my recommended worldwide equity portfolio vastly outperformed the S&P 500.
Indeed, when that venerable index was tasked with providing inflation-adjusted moderate distributions, it ran out of money after 23 years. The worldwide equity portfolio, in that same period, grew so much that it could have easily supported higher future distributions without running out of money.
4. Should you plan to take out fixed distributions (adjusted for inflation), or should you let your distributions vary with your investment returns?
This is a big topic, which I wrote about earlier this year.
In short, if you have saved more money than you absolutely need, you may find that variable distributions are a great luxury.
In my own situation, my wife and I have our portfolio allocated 50/50 between equities and fixed-income funds and our distribution rate is 5% (which we can afford because we have ample savings). I believe our risk of running out of money is very low.
Here's some suggested reading on this topic.