Retirement planning is less a single calculation than a set of recurring questions about spending, income, time, and risk. The answers change as life does, which is why the plan is revisited rather than filed away.
A long horizon in two parts
During working years, the central question is how much to set aside and how to hold it. The horizon is long, income is usually being earned, and there is time to recover from setbacks. In retirement, the questions invert. Income from work stops or falls, the horizon is still long but now uncertain in a different way, and the portfolio must provide rather than accumulate.
The two phases call for different emphases. Accumulation tends to reward consistency: saving regularly, keeping costs in view, and avoiding decisions driven by short-term market movements. Drawdown places more weight on the reliability of income, the order in which assets are drawn, and the ability to adjust spending if conditions require it. Planning for the second phase during the first is what allows the transition to be orderly.
Estimating what retirement costs
Retirement spending is rarely a single steady figure. Some costs fall away, such as commuting and retirement saving itself. Others rise, particularly health care and, later in life, care and support. Spending often follows a pattern: higher in the early, more active years, lower in the middle, and higher again if care is needed. Inflation compounds over a long retirement, so a level of spending that seems comfortable at the outset may buy considerably less two decades on.
A reasonable estimate begins with current spending, adjusts for what will change, allows for inflation, and considers the large irregular items, such as a change of home, support for family, or a major health expense, that a simple annual figure would miss. Because none of this can be known precisely, planning for retirement generally means planning for a range of outcomes rather than one.
Sources of retirement income
Retirement income usually comes from several sources, each with its own character:
- Government benefits such as Social Security, which depend on work history and on the age at which benefits are claimed. Claiming decisions can have long-lasting effects and merit careful consideration.
- Employer plans and pensions, where they exist, which may offer a lifetime income, a lump sum, or a choice between them.
- Personal savings and investments, held in tax-advantaged retirement accounts and in ordinary taxable accounts, each of which has different tax treatment and different rules on contributions and withdrawals.
- Other assets: property, a business interest, or part-time work, each of which brings its own considerations of liquidity and reliability.
Understanding how these sources fit together, which are fixed and which are variable, which are guaranteed by a third party and which depend on markets, is a central part of retirement planning. The mix, rather than any one source, determines how resilient a retirement income is likely to be.
Drawing down: sequence and flexibility
Once retirement begins, the order in which assets are drawn matters. Drawing from different types of account in different years affects the taxes paid over a lifetime, and the timing of withdrawals relative to market movements affects how long a portfolio lasts. Withdrawals made when asset values are depressed lock in losses that a portfolio in accumulation would simply have waited out. This is sometimes called sequence risk, and it is one reason the early years of retirement receive particular attention.
No withdrawal method eliminates this risk. Approaches that hold a reserve of liquid assets to meet near-term spending, that adjust withdrawals in response to portfolio performance, or that separate essential from discretionary spending are all ways of building flexibility into a plan. Which approach suits a particular retiree depends on that person's circumstances, resources, and tolerance for variability in income.
Taxes and account types
Retirement accounts come in several forms, and the rules that govern them, including when contributions may be made, when withdrawals are required, and how each is taxed, are detailed and change over time. The interaction among account types, government benefits, and ordinary income can produce results that are not obvious, and the decisions made in one year can affect the tax position in later years.
For these reasons, tax considerations run through every part of retirement planning, and the specific treatment of any account or withdrawal should be confirmed with a qualified tax professional in light of current law and the individual's own situation.
- What do I expect to spend in retirement, and how does that compare with what I spend now?
- Which of my expected income sources are fixed, and which depend on markets or on my own decisions?
- How would my plan hold up if markets were weak in the first years after I stop working?
- Do I understand how and when each of my accounts can be drawn, and how each is taxed?
- What would I be prepared to change, and in what order, if my resources fell short of my expectations?
Retirement planning is among the matters the firm's financial planning and consultation service may address, alongside goal and cash-flow planning, investment and asset-allocation planning, education funding, and review of an existing portfolio. Where a client engages the firm for ongoing management, the client's objectives, time horizon, liquidity needs, and tax circumstances are recorded in an investment policy statement or comparable profile, and accounts are reviewed against it no less than annually and when circumstances change, including retirement. The firm does not provide tax advice. Its services, fees, and conflicts of interest are described in its Form ADV; see also the Wealth Management page.
This note is provided by Swiss Finance Private Wealth Management LLC for educational and informational purposes only. It is general in nature, does not take into account the objectives, financial situation, or needs of any particular person, and should not be relied upon as investment, legal, tax, or accounting advice, as a recommendation of any security, strategy, or course of action, or as an offer of advisory services. Advisory services are provided only under a written advisory agreement. Investing in securities involves risk of loss that clients should be prepared to bear; no method of analysis or investment strategy can eliminate the risk of loss or assure a profit, and diversification does not guarantee against loss. The firm does not provide legal or tax advice; readers should consult their own attorney and tax professional about their circumstances. Laws and regulations change, and the firm undertakes no obligation to update this note. The firm's services, fees, methods of analysis, risks, and conflicts of interest are described in its Form ADV, available through the SEC's Investment Adviser Public Disclosure website.