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An effective retirement plan cannot simply be established at the start of one’s career and then forgotten. In fact, retirement planning requires an ongoing commitment to review and redesign, along with a dynamic approach to asset management and response to market volatility.

To enable a successful retirement, there are three specific tactics that should be employed in the years leading up to retirement: developing a budget, reviewing asset allocation, and designing a withdrawal strategy.

1. Developing a Budget

It may seem like overly simplistic advice, but budgeting can either push a retirement plan to success or drive it to failure. While many believe a budget is simply an awareness of what one is spending, its actual purpose is to ensure that one lives within their means and that every dollar earned is deployed with strategic purpose. To accomplish this, one must have a written and managed budget, not a simple mental tally of expenditures.

To begin, prospective retirees should make a list of their lifestyle needs, including basic necessities such as meals, mortgage, utilities, and insurance. This list should also include savings contributions.

Deciding how much to save today will depend greatly on how much one expects to spend during retirement. There is no way to determine that without attempting to project future expenses. One can accomplish this by creating budgets based on assorted post-retirement factors including location, size of home, hobbies, frequency of vacations, and other post-retirement lifestyle expectations. These budget exercises provide a broader view of how effective a retirement savings plan can be based on various lifestyle decisions.  It may be helpful to model multiple scenarios, including an aggressive and conservative budget

A common mistake made by many investors during this exercise is assuming substantial investment returns to justify expensive lifestyle choices. Expecting massive returns on minimal savings is dangerous to a retirement plan. Consult with an advisor to determine a reasonable expected return based on historical performance, portfolio components, and other factors.

2. Reviewing Asset Allocation

Asset allocation encompasses the types of investments within a portfolio, their various underlying industries, risk, and level of market correlation. One of the most important strategies for proper asset allocation is diversification.

Managing Diversification

Diversification is the process of varying the allocation of value in a portfolio among a variety of sectors, investment types, and risks to reduce each investment’s correlation with the others, thus ensuring some buffer against significant swings wiping out an entire portfolio. Proper diversification offers one of the most effective ways of mitigating losses.

For investors to understand the importance of diversification, they should realize that history tends to repeat itself, and one unfortunate outcome can result in a complete loss of a lifetime of savings.  One example is the employees who were overly invested in Enron stock in the early 2000s. According to the New York Times, the Enron 401(k) plan, which was over-weighted in Enron shares, lost more than $1 billion in value in 2001 when the company went bankrupt and shares of Enron stock fell 94 percent. Today, employees heavily invested in GE stock are feeling much of the same loss as Enron employees did 17 years ago.

Putting Returns in Their Place

Risk tolerance is an investor’s ability to mentally and financially withstand volatility in investment performance. An investor with a high risk tolerance may be young, with decades of expected income, and relatively unbothered by large swings in investment values. A more conservative investor may be one with fewer working years through which to replenish investment losses, who becomes stressed at the idea of volatile investment swings.

As investors age, they need to reallocate their assets into increasingly conservative investments to best limit their exposure to loss as their investment time horizon shortens. Additionally, careful consideration must be made to properly limit downside risk, potentially through fixed income and alternative investments.

The idea of reallocating to more conservative assets can be troubling to those who are focused on maximizing returns because conservative investments tend to have limited upside potential. To understand why this move is often more beneficial than seeking higher returns in later life, one needs only to be familiar with sequence of returns risk.

Sequence of returns risk is the danger that the timing of liquidation and withdrawal from a retirement account will coincide with a downturn in the market. If it does, then it effectively reduces the overall potential performance of the entire portfolio because a larger number of shares will need to be liquidated to get the income expected, thus leaving fewer shares in the portfolio to grow.

Sequence of returns risk may not be important during the accumulation phase, but during the withdrawal phase it is one of the most critical factors in the overall success of a retirement plan, making it a higher priority than chasing returns.

3. Designing a Withdrawal Strategy

While a primary focus for most is to save and accumulate funds for retirement, the design of a withdrawal strategy is equally important to financial health in retirement.

Selecting a Withdrawal Rate

A fundamental pitfall in static retirement plans is setting a withdrawal rate which is fixed over a retirement period.  Consider that the retirement stage of life for many individuals is likely to last 20 years or more.  In that time, investment yields may vary widely and both tax rates and personal spending habits could also change.  Because of these changing variables, it is essential that flexibility be built in to retirement planning, both in initial models (high, middle, low) and when reviewing the plan each year (or more frequently). Only by having flexible planning models and periodically adjusting them based on real-time results, can one expect to follow a model that can endure throughout retirement — regardless of how many years, or decades that retirement may last.

Making Room for Taxes

No one knows what tax rates will be upon retirement. This does not mean that tax planning should be ignored, but that one should account for the potential costs of taxes and design a strategy to minimize them.

To do this, one must understand how taxes will impact withdrawals and liquidations. Having a plan that considers which withdrawals will trigger ordinary income taxes, which will incur capital gains, and which will realize no tax, is essential.

Lastly, understand that delaying distributions from retirement assets will have the greatest impact on your ability to have a successful retirement. Physicians and other professionals may have the option of easing into retirement by exploring alternative roles, such as consulting. This can allow them to generate a supplemental income for several years, thus moderating the stress on their portfolios by reducing the rate of withdrawal. Transitioning into retirement gradually without a sudden loss of income can enhance the odds of success.


Most see a comfortable retirement as a reward for decades of hard work.  Do not let the absence of pre-retirement planning hinder this goal.  While understanding the three strategies above are a good start, there is no substitute for working with an experienced advisor in the field who can make analyses and recommendations specific to your situation. The authors welcome your questions.

David B. Mandell, JD, MBA, is an attorney, consultant and author of more than a dozen books, including Wealth Management Made Simple. He is a principal of the wealth management firm OJM Group, where Andrew Taylor, CFP® is a wealth advisor.