How to adjust financial planning during retirement

January 1, 2011

The need for retirement planning doesn't end with the onset of retirement.

Key Points

Q. Since I'll be retiring next year, what changes do I need to make in my investment portfolio?

Keep in mind that risk and return go together. A higher allocation to equities increases the risk of experiencing periods of poor returns during retirement. But if you can handle the risk, having more equity exposure in a portfolio enhances its return potential. Growth can bring higher cash flow, inflation protection, and portfolio endurance over time. While it is logical that investors should have an equity component in their portfolios, the actual weighting should be dependent on one's time frame, risk tolerance, and spending flexibility.

Spending level. Portfolio withdrawal is typically described in terms of either a specified dollar amount (ie, $100,000 per year) or a percentage of annual portfolio value (ie, 5% of assets each year). In the case of the former, withdrawing a fixed amount each year and adjusting it for inflation can provide a stable income stream and preserve your living standard over time. But the portfolio may survive only if future withdrawals represent a small proportion of the portfolio's value.

On the other hand, withdrawing a fixed percentage of assets based on annual asset value makes it unlikely that you will deplete retirement assets because a sudden drop in market value would be accompanied by a proportional decline in spending. But this method can produce wide swings in your living standard when investment returns are volatile. Retirees who need relatively consistent cash flow may want to combine these two methods.