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June 16, 2011

Plan for the expected — but prepare for the unexpected

To enjoy a comfortable retirement lifestyle, you'll need to have adequate financial resources in place. And that means you must plan for the expected — but prepare for the unexpected.

In planning for the "expected" aspects of your retirement, consider these factors:

Your vision of your retirement lifestyle. What do you want to do during your retirement years? Spend more time with your family? Volunteer? Open your own business? Your expectations of your retirement lifestyle will dictate, to a large extent, your savings and investment strategies.

Your expenses. Once you've established a vision for your retirement lifestyle, you can begin to estimate the expenses you expect to incur during your retirement years.

Your income. You can expect to receive income from a variety of sources: Social Security, pensions, part-time employment and investments, such as your IRA, 401(k) and any taxable investment accounts you may have. You'll need to estimate about how much income all these sources could provide.

Your withdrawal rate. If your investments are going to provide a significant part of your retirement income, you need to carefully manage annual withdrawals from your portfolio. Your withdrawal rate is key in helping to ensure your portfolio provides for your needs as long as you need it.

Your portfolio reliance rate. Related to your portfolio withdrawal rate is your portfolio reliance rate - how much you rely on your portfolio to provide income. For instance, if you will need $50,000 per year in retirement, and $30,000 will come from your portfolio, your reliance rate will be 60% ($30,000 divided by $50,000). Your reliance rate will help determine how sensitive your strategy might be to outside events, such as market fluctuations.

While you need to be familiar with these expected elements of your retirement, you also must be prepared for the unexpected aspects, such as these:

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