retirement planning

Don’t Let Retirement Planning Faze You: What to Focus on in Each Phase

When you think about all the moving parts to planning for retirement, it can feel overwhelming. But breaking it down into four phases could help bring the details into focus.

It is crucial to think about the long term when you are planning for your retirement. It is never too soon to start, and having a plan – a specific road map to retirement – is absolutely essential.

Effective retirement planning comes down to four phases:

1. The accumulation phase

The accumulation phase is one of accumulating assets, usually from earned income. However, most individuals do not put away enough, or they use the wrong vehicles for accumulating assets.

Today, most people rely on just their 401(k) plans to save for retirement, only to find out later that the savings are not enough, and their withdrawals are fully taxable. In addition to a 401(k), investors can utilize long-term savings vehicles like Roth IRAs or brokerage accounts, in which after-tax funds are invested for retirement. Self-employed investors have many options, such as the Solo 401(k), traditional or Roth IRA, SEP IRA and defined benefit plans. It is imperative to meet with a retirement adviser early on to get advice on both how much and where you should be putting your hard-earned savings during the accumulation phase. 

2. The planning and preservation phase

Many people tend to ride the market roller coaster all the way until their last working day, and they simply cross their fingers and hope the market won’t plunge in the critical few years just before and after retirement. As you get closer to the distribution phase, you must start preserving what you have accumulated.

One thing you should do is scale back risk. Consider adhering to the adage 100 years minus your age equals the most money you should have at risk. Example: If you are 50, you should only have 50% of your portfolio at risk; at 60 you should only have 40% at risk, and so on.

Now, if you will have a pension or other guaranteed income in retirement, this rule of thumb may be too conservative for you, and you may feel that you can afford more risk. But you should still be careful. The last thing anyone wants is a major loss in the seven to 10 years prior to retirement. During those years, you should watch for good times when the market is up to sell off riskier investments and move those assets to vehicles that are protected from loss.

Scaling back risk as you get closer to retirement is only one part of a solid retirement plan. Your plan should also include a year-by-year spendable income strategy to meet and exceed your goals in the distribution phase while considering taxes, inflation, liquidity, market losses, required minimum distributions, the cost of health care, and funds to cover any unanticipated large purchases.

Finally, your plan should include some protection against long-term care costs, which can quickly decimate a retirement portfolio, and premature death, which can sometimes leave a surviving spouse with significantly lower guaranteed income.

3. The distribution phase

This is retirement — the phase you have been saving for your whole life — and you deserve to enjoy it. Continue to scale back risk as you get older, and be sure to stick to the plan.

Again, the cushion of liquid assets that you are not relying on to supplement your income will help cover the cost of any unanticipated large purchases, but you should not simply pull those assets from anywhere at any time. You do not want to sell off assets that are market sensitive during a down trend or a bear market, so it is good to have some of these funds in a vehicle that is not market sensitive and is very liquid.

4. The legacy phase

People want to leave money behind if they can, but that should not be your top priority. Instead, your top priority should be making it through retirement without going broke.

You may think that your IRA funds that you put away pretax might be a great gift to your heirs, but they can also be a curse. IRA money left to anyone other than the surviving spouse increases the recipient’s taxable income in the year it is received. If you want to leave money behind, there are other types of accounts, such as Roth IRAs, that are better for leaving to your family. Distributions from Roth IRAs are tax-free if the person who set up the account met the five-year holding period for contributions and conversions.

Annuities are another option that people utilize because they bypass probate upon death in most states, and the growth is tax-deferred until you or your beneficiaries make withdrawals. Stocks can be a good option because your beneficiaries inherit the stepped-up value, which means that they never have to pay taxes for any growth or increase in value that you may have experienced before they inherit the stock.

Best of all for inheritance is life insurance. With life insurance, your beneficiaries are not required to pay taxes on the difference between the premiums paid and the death benefit, which is often significant.

Each retirement planning phase calls for a different set of rules. Make sure you have a plan that is designed to change with the phases and will put you in the best possible position for your retirement.

Dan Dunkin contributed to this article.

About the Author

Max Verkuilen, Certified Long Term Care Insurance Professional

President, Independent Retirement Group

Max Verkuilen is the president of Independent Retirement Group and managing partner of InPower Investments and Wealth Strategies. He is certified in long-term care planning and has won several awards for financial and insurance planning, including Elite Producer by Security Benefit and Excellence in Insurance and Financial Planning by Advisors Excel.

Leslie Verkuilen, Investment Adviser Representative

President and Managing Partner, InPower Investments & Wealth Strategies

Leslie C. Verkuilen is an Investment Adviser Representative and licensed insurance agent. She is President of Wisconsin-based InPower Investments & Wealth Strategies and Managing Partner of Independent Retirement Group. She is passionate about informing and motivating clients, helping them succeed with their personal and business goals.

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

Most Popular

Who Should Return Their Third Stimulus Check to the IRS?
Coronavirus and Your Money

Who Should Return Their Third Stimulus Check to the IRS?

Some people who receive a third stimulus check are required to send it back to the IRS. Others can return it voluntarily.
April 12, 2021
Where's My Stimulus Check? Use the IRS's "Get My Payment" Tool to Get an Answer
Coronavirus and Your Money

Where's My Stimulus Check? Use the IRS's "Get My Payment" Tool to Get an Answer

The IRS has an online tool that lets you track the status of your third stimulus check.
April 4, 2021
11 Good Reasons to Cancel Amazon Prime
Budgeting

11 Good Reasons to Cancel Amazon Prime

You probably aren't using most of the perks tucked into that $119 annual fee -- which you don't need to pay to get the free Amazon shipping you crave.
April 13, 2021

Recommended

What NOT to Do with Your TSP: 8 Thrift Savings Plan Mistakes to Avoid
retirement planning

What NOT to Do with Your TSP: 8 Thrift Savings Plan Mistakes to Avoid

Many federal workers saving for retirement in TSPs get tripped up by these common pitfalls. To help maximize your own savings, make sure you steer cle…
April 14, 2021
COVID-19 Super Savers Need to Carefully Navigate in a Post-Pandemic World
personal finance

COVID-19 Super Savers Need to Carefully Navigate in a Post-Pandemic World

The pandemic has turned many people into saving machines, which is great, but that comes with its own set of risks. These frugal folks need to be extr…
April 13, 2021
‘Gray Divorce’ Rates Are Exploding Due to This Perfect Storm
Divorce

‘Gray Divorce’ Rates Are Exploding Due to This Perfect Storm

Here’s why divorce rates among those 50 and older are booming … and what women can do to recover and rebound.
April 12, 2021
How to Pay Off $130,000 in Parent PLUS Loans for Just $33,000
Paying for College

How to Pay Off $130,000 in Parent PLUS Loans for Just $33,000

Meet Nate. He took out $130,000 in Parent PLUS loans for his kids. The standard repayment plan will cost him over $170,000. But some smart strategizin…
April 12, 2021