Those who are in or about to be in retirement are moving from what financial advisors term the “accumulation stage” into the “distribution stage” of retirement planning. It is crucial that those who are about to retire or are already in retirement understand how the rules of the game change when moving to this new and different stage.
What most people don’t realize about retirement is that their income needs to keep pace with inflation. Ten years ago, a gallon of milk cost less than it does today. Ten years from now, that same gallon of milk will likely cost more.
This is probably true for just about everything you will buy in the future. Your retirement income plan needs to be able to account for this unfortunate fact. If you do not plan for inflation, it will be too late when you realize the problem.
In the accumulation stage, dollar cost averaging (DCA) and maximizing return are your friends. In the distribution stage the concept of dollar cost averaging is your enemy, and volatility, not return, becomes your primary concern.
When accumulating assets, DCA works like this: In a down market, your purchasing power increases (meaning you can buy more shares with a set dollar amount). As the market goes up, that same set dollar amount will buy you fewer shares. Therefore, your average cost per share is lower than a straight share cost average because you can buy a proportionally greater number of shares when the market dips.
This becomes a substantial issue in retirement. The biggest challenge in the distribution stage of retirement planning is not down markets. Down markets are like rainy days, we don’t know when they’re going to happen, we just know that they are going to occur.
The biggest challenge is planning so that you can avoid having to SELL during a down market because you’ll have to sell more shares to generate the same income stream. Our approach to retirement income planning is designed with just this in mind.
Though there are no guarantees, careful planning can significantly minimize the hazards one faces throughout retirement.
No two investors are the same. Balanced Wealth Advisors provides customized investment solutions for families and individuals. Contact us or call (603) 424-1892.
A question we are often asked is “How can I invest my nest egg and create a stable income stream so that I won’t run out of money when I retire?” This is a concern for nearly everyone that we work with as they approach retirement.
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