Countdown to retirement: How to plan, protect your safety bucket

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By Frank Migliazzo
Dolan Media Newswires

Attorneys strategize for a living. Looking for opportunities and watching out for downfalls is their trade.

Too often, however, those skill sets aren’t used when it comes to planning for their own retirement.

But retirement planning is no different than case strategy: strive to make aspirations come to fruition, but be prepared for the pitfalls along the way.

While there are changes you will want to make to your portfolio as you near your desired retirement age, there are also things you’ll want to do regardless if you are 20 or more years from retirement or if you’re planning to retire in the next couple of years.

The earlier you start to save for retirement, the better. That caveat is even more important to keep in mind now that people are living longer and will need more resources to fund a longer post-employment phase.

Some key points that are often overlooked in retirement planning are factoring in taxes, inflation, and the long-term importance of budgeting in your overall strategy.

During our wealth accumulation years, we hope to be fortunate to not have to stick to a weekly budget to get by. However, it’s imperative to focus on budgeting early to accumulate the level of assets that you will need to live the lifestyle you are accustomed to, or aspire to, in retirement.

20 years from retirement

The longer time period you have before retirement, the more risks you can take with a portion of your investment portfolio. That does not mean you shouldn’t protect your cash flow needs. Your “safety bucket” needs to be kept as safe as possible regardless of the projected time line of your retirement.

Other than the conservative investments needed for your safety bucket, this could be the time to consider more aggressive investments such as stocks and real estate for a larger portion of your overall portfolio.

10 years from retirement

During this period, you may still be able to support moderately aggressive investments in a portion of your portfolio. Consider incorporating more exposure to cash and bonds to protect your safety bucket. Here you will have less time to make up for a bad year or two in the markets, and a really bad year can be a major setback to your retirement plan.

In the last recession, some people lost a lot of their investment gains and principal that they worked years to build. Some investors who were ready to retire had to rethink their entire retirement strategy. For some, this meant changing their desired lifestyle to a new lifestyle to fit their reduced retirement savings.

We can run our clients’ portfolios through different scenarios, from idyllic to disastrous. This process can help them prepare for unplanned events. For example, we often see now is how few are prepared to care for aging parents. Parents are living longer, and the reality is they may run out of money and need financial help from their children.

Five years from retirement

When you’re so close to retirement, you should consider being conservative in your investments. Based on all you know about your financial needs and wants during retirement, your safety bucket should be filled, then protected.

The hardest thing to do in retirement planning is to go backward. Many realize too late that they don’t have enough to live on and are faced with making some tough — and, in some cases, ill-advised — decisions to compensate for the shortfall. These include having to work years longer than planned, modifying expectations downward and taking on more investment risk than they should during this period.

Plan as early as possible, have your allocations in the right place, and revisit — and potentially revise — your plan with a financial professional every year or two.

Frank Migliazzo is the leader of Troy, Mich.-based The Migliazzo Group, a private banking and investment group team at Merrill Lynch.