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Freeman's Blog

October 2, 2016

timing your retirement

In an ideal world, you would have many option when timing your retirement. You would leave the workforce, out of debt, and your nest egg would be large enough to provide a comfortable retirement. In fact, you might have some left over to leave a legacy for your heirs.

Unfortunately, this is not a perfect world, and events can take you by surprise. Only four out of 10 current retirees said they retired when they had planned; half retired earlier.1 But even if you retire on schedule and have other pieces of the retirement puzzle in place, you cannot predict the stock market. It would be wise to prepare for the possibility that you might retire during a index downturn.

Timing Your Retirement

Here is one strategy you can use when timing your retirement that may help address volatility. You can allocate your nest egg dollars into three different “buckets”.

Short-term (first 2 to 3 years): Cash and cash alternatives that you could draw on regardless of the index at the time you retire.

Mid-term (3 to 10 years in the future): Mostly fixed-income vehicles that may have moderate growth potential with low or moderate volatility; you might also have some equities in this bucket.

Long-term (more than 10 years in the future): Primarily growth-oriented financial instruments such as stocks that might be more volatile but have higher growth potential over the long term.

Throughout your retirement, you can shift nest egg dollars from the long-term bucket to the other two buckets. This would allow you to have short-term and mid-term dollars available.

Timing Your Retirement Withdrawals

One common rule of thumb for determining the amount of your annual withdrawals is the “4% rule.” According to this strategy, you initially withdraw 4% of your portfolio, increasing the amount annually to account for inflation. However, some experts consider this approach to be too aggressive. So you might withdraw more or less depending on your personal situation and index performance.

Regardless of the amount you decide to withdraw from your nest egg, timing your retirement withdrawals is critical. The three-part strategy enables you to monitor activity in your mid-term and long-term buckets while drawing only from the more stable short-term bucket of cash alternatives. You could then shift nest egg dollars as appropriate based on your needs and longer-term index cycles.

If timing your retirement is important for you, consider restructuring your portfolio before you retire. This provides flexibility to adjust your nest egg dollars. Even with careful planning, retirement can bring surprises. So, be selective and wise in your decision-making.

Asset allocation is a method to help manage fluctuation in your nest egg dollar growth; it does not guarantee a profit or protect against product or financial instrument losses.

1) Employee Benefit Research Institute, 2015

Freeman Owen, Jr -Retirement Specialist

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