• Retirement and Annuity Advisor Jennifer Lang

Why Just Having a Large Lump Sum Isn't Enough for Your Retirement

Congratulations! You have accumulated a nice “nest egg” – or a large lump sum for your retirement. But, believe it or not, just having a hefty portfolio and other assets isn't enough to ensure your retirement security.

There is also the matter of making sure your money lasts for the rest of your lifetime. A retirement income plan will go a long way toward helping you enjoy a comfortable retirement lifestyle.

In other words, building up retirement capital and investing your way to a large portfolio size isn't enough. It's just as important to know what you will do with the money you have accumulated through the development of income and distribution strategies.

Potholes to Avoid on the Road to Retirement

With a large-sized portfolio in hand, you may feel like your financial future is set, but there are still plenty of potholes to avoid on your road to retirement.

The first one is undisciplined spending. When you retire, you have newfound freedom and time. This might prompt scheduling expensive trips abroad, increasing your travel schedule to visit friends and family, or finally indulging in that classic car you have had your eye on for years.

Depletion of a nest egg for income too quickly isn’t just a remote possibility. Headlines show that consumer debt is near an all-time high, and many Americans have little-to-no retirement savings, according to the U.S. Government Accountability Office.

While these may be rewarding pursuits, putting the brakes on unbridled spending and developing a long-term retirement spending plan will help prevent the wheels from coming off during your retirement journey.

Another reason it’s prudent to “keep your powder dry,” as they say?

Who knows what health challenges or emergencies you will face during in the coming years? And, if your money is unprotected, how could sequence risk affect your income security in the event of a market down-turn?

Converting a Nest Egg Lump Sum into Lifelong Retirement Income

For many retirees, another common blunder is presuming that bucket of money you are taking into retirement is enough to last a lifetime.

The problem? You have to pay for a lifetime. And our lifetimes are getting longer.

Vanguard analyzed mortality data from the Society of Actuaries Retirement Participant 2000 Table and determined the likelihood of 65-year-olds living to certain ages:

  • A 65-year-old man has a 41% chance of living to age 85 and a 20% chance of living to age 90.

  • A 65-year-old woman has a 53% chance of living to age 85 and a 32% chance of living to age 90.

  • If the man and woman are married, the chance that at least one of them will live to any given age is increased.

  • There is a 72% chance that one of them will live to age 85 and a 45% chance that one will live to age 90.

  • There is even an 18% chance that one of them will live to age 95

Getting the Most Mileage Out of Your Money

To make it all the way without running out of gas with miles (years) to go, you need a rock-solid plan that lays out your strategies for income and distributions from your income sources.

But a nationwide poll by Kiplinger’s Personal Finance released early this year suggests that most of us are driving without a map.

According to their survey of investors between the ages of 35 and 64, equally divided between men and women, fewer than 50% of respondents had a withdrawal plan. The survey also cited a withdrawal plan as a critical and often-overlooked part of planning for retirement.

Clearly, it's just as important to plan for the latter part of your financial life, when you are retired and living off your lifetime-accumulated money, as it is for the accumulation period that got you here.

Put Together a Roadmap for More Financial Certainty

Such a plan needs to incorporate five elements, which we can think of as a five-story hotel:

- Protection (Your main floor is made up of the insurances you carry)

- Retirement (Even when you are retired, what's your long-term game-plan for maintaining your financial well-being?)

- Investing (What allocations in your portfolio will you need to achieve your goals and meet your needs?)

- Taxes (A tax bill can take a big bite out of your nest egg, especially if you dip into tax-advantaged accounts for money and trigger a tax burden in the process. Tax planning is essential!)

- Estate planning (Who might be your legal guardian in later years, and how will other later-life affairs be handled?)

Now that you know what is involved in achieving your retirement lifestyle, while moving through your lifespan, it’s time to consult with a professional who can show you what options are available to you.

Another eye-opener Kiplinger reported in its survey results: The majority (61%) of those with a long-term financial plan are working with a financial professional.