The formula for retirement planning is simple – save early, save consistently, and let your wealth compound. However, one still needs to strategize this process to meet one’s goals. A thorough retirement plan needs direction when it comes to saving and investment while keeping a close eye on eventualities like health issues, taxation, and inflation. The better one is at planning for retirement, the easier it will be for them to ensure their retirement nest egg’s safety.
At its core, retirement planning can be categorized into the accumulation phase and the distribution phase. Let’s take a look at the significance of each:
What is the Accumulation Phase?
As the name indicates, the accumulation phase is the period when the individual saves and plans to generate value from their investment.
The accumulation phase starts by deducing the “magic number” – that is, the valuation that one needs to hit to become financially independent. Financial independence is the state where the person works because they want to, not because they have to. Typically, the magic number is 30x or 40x the individual’s monthly expenses. Some even consider it to be 50x to be on the safer side. Thereafter, people can go about building a portfolio and touching this magic mark.
What is the Distribution Phase?
The distribution phase refers to the period when the retiree accesses and uses the funds created in the accumulation phase. In other words, you retire – putting an end to the earned income.
The different investments that you may have made during the accumulation phase now bear fruit in the form of passive income streams that can sustain the retiree’s quality of life without getting affected by inflation. At this point, all you need to do is budget your savings to live comfortably.
Transitioning From Accumulation to Distribution Phase
From the above, it is clear that the accumulation phase paves way for the distribution phase. Even though it may seem challenging and just a tinge foreboding, a slight change in focus and mindset can make the metamorphosis seamless. Here are a few tips that can help:
1. Overcome any attitudinal barriers that could be coming in the way of moving from accumulation to distribution phase. Such an adjustment will also affect spending habits and financial status.
2. Your risk appetite will decrease as you become more vulnerable to market-linked volatility and errors could prove to be fatal. Practice prudence during cash flow management.
3. Assets that are not necessary for immediate income generation activities should be invested in equity for higher growth and protection from inflation.
4. Set up a systematic withdrawal plan that is fixed as a certain percentage of your account balance. The subsequent withdrawal will match up with the annual inflation rate.
5. Set aside sufficient cash in a money-market fund to finance two or more years’ worth of expenses and invest the rest of the portfolio to harvest total returns.
At Hampton Wealth Management, we help individuals and organizations meet their financial goals. Get in touch with our advisors to secure your financial future!