Plan for the expected, but prepare for the unexpected - Ahwatukee Foothills News: Business

Plan for the expected, but prepare for the unexpected

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Posted: Friday, July 8, 2011 7:00 pm | Updated: 4:34 pm, Thu Nov 17, 2011.

To enjoy a comfortable retirement lifestyle, you'll need to have adequate financial resources in place. And that means you must plan for the expected, but prepare for the unexpected.

In planning for the "expected" aspects of your retirement, consider these factors:

Your vision of your retirement lifestyle. What do you want to do during your retirement years? Spend more time with your family? Volunteer? Open your own business? Your expectations of your retirement lifestyle will dictate, to a large extent, your savings and investment strategies.

Your expenses. Once you've established a vision for your retirement lifestyle, you can begin to estimate the expenses you expect to incur during your retirement years.

Your income. You can expect to receive income from a variety of sources: Social Security, pensions, part-time employment and investments, such as your IRA, 401(k) and any taxable investment accounts you may have. You'll need to estimate about how much income all these sources could provide.

Your withdrawal rate. If your investments are going to provide a significant part of your retirement income, you need to carefully manage annual withdrawals from your portfolio. Your withdrawal rate is key in helping to ensure your portfolio provides for your needs as long as you need it.

Your portfolio reliance rate. Related to your portfolio withdrawal rate is your portfolio reliance rate: How much you rely on your portfolio to provide income. For instance, if you will need $50,000 per year in retirement, and $30,000 will come from your portfolio, your reliance rate will be 60 percent ($30,000 divided by $50,000). Your reliance rate will help determine how sensitive your strategy might be to outside events, such as market fluctuations.

While you need to be familiar with these expected elements of your retirement, you also must be prepared for the unexpected aspects, such as these:

Living longer than you expect. How long you can expect to live is somewhat of a mystery. If you were to live longer than you anticipate, would you be financially prepared? To help make sure your money lasts throughout your lifetime, you may need to consider investments that can provide you with a lifetime income stream. And your longevity will obviously also affect your annual portfolio withdrawal rate.

Inflation. At an average inflation rate of 3 percent, your cost of living will double in about 24 years. That's why, even in retirement, you will need some growth-oriented investments, such as quality stocks to ensure you can maintain your desired retirement lifestyle. But if the unexpected happens, and inflation takes off at a much higher than average level, you may need to consider a greater amount of investments that offer the potential for rising income.

Health care. Even after you're on Medicare, which won't cover everything, you need to prepare for the unexpected, such as a lengthy illness or the need for some type of long-term care. You may also wish to "self-insure" to a certain extent by setting aside funds in a liquid, stable account.

By positioning your investment portfolio for both the expected and the unexpected, you can go a long way toward enjoying the retirement lifestyle you seek. So plan ahead - and make the necessary adjustments as time goes by.

• This article was written by Edward Jones for use by Ahwatukee Foothills Edward Jones Financial Advisor Joseph B. Ortiz, CRPS. Reach Ortiz at (480) 753-7664 or joseph.ortiz@edwardjones.com. Chartered Retirement Plans Specialist and CRPS are registered service marks of the College for Financial Planning.

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