For many people, the years leading into retirement are a time of not only eager anticipation, but also serious contemplation about what must be done to achieve their goals.
Building Your Retirement Plan: A Framework
In the years approaching retirement, you should be thinking about whether your current plan puts you in the best position to achieve the lifestyle you envision for your golden years. For many people, the years leading into retirement are a time of not only eager anticipation, but also serious contemplation about what must be done to achieve their goals.
Five Key Factors to Consider When Planning Your Retirement Strategy
1. Your time horizon
While younger investors have the luxury of time for recouping investment losses before they retire, older investors do not. As you get closer to retirement, you will need to shift your mindset from accumulating assets to utilizing the assets you’ve worked so diligently to earn. You may want to consider repositioning your portfolio to reduce risk and preserve your wealth for retirement.
2. Your evolving priorities
Your priorities may change from accumulating assets to converting those assets to income. This change will affect your investment decisions and the types of investments you consider for your portfolio. In addition, you may have other priorities competing for your assets—for example, college tuition for your grandchildren. Try to quantify the costs of your priorities and factor them into your planning.
3. Your risk tolerance
Risk is extremely subjective. How much risk you are willing to take on is a function of how much of a loss you’re willing to accept and how losses might affect your ability to generate the income you will need from your investments. You will also need to consider inflation. To help you achieve your vision of retirement, your investments will need to keep pace with—or exceed—the inflation rate.
4. Required Minimum Distributions
Annual Required Minimum Distributions (RMDs) are a fact of retirement life. If you have a traditional individual retirement account (IRA) or an employer-sponsored retirement plan, you must begin taking minimum distributions by April 1 of the year following the year in which you reach age 70½.
If you have more than one traditional IRA, there is an RMD for each of them. However, you have the option to either withdraw the total amount of RMDs from any one of those accounts or take the required RMD from each individual account. If you have multiple employer-sponsored retirement plans, the minimum distribution must be calculated and withdrawn from each account separately.
5. Asset consolidation
As you approach retirement, you may find that you have assets scattered among many different accounts and across many financial institutions. To help simplify management of these assets, you may want to consider consolidating accounts where possible. Among other things, this makes it easier for you to monitor performance and to make withdrawals in an efficient manner.
With qualified plans such as IRAs and employer-sponsored retirement plans, you can usually consolidate assets by rolling over or transferring these assets to an eligible IRA. There are certain procedures that need to be followed to ensure that you are not subject to taxes or early withdrawal penalties. A Financial Advisor may be a valuable resource during this process.
Once you reach retirement and start withdrawing assets, you generally want to withdraw assets from accounts where there are little or no tax consequences. However, the precise order of withdrawals may vary depending on your needs and circumstances and you may want to speak with a Financial Advisor about a withdrawal order that works best for you.
This article has been prepared for informational purposes only. The information and data in the article has been obtained from sources outside of Morgan Stanley. Morgan Stanley makes no representations or guarantees as to the accuracy or completeness of the information or data from sources outside of Morgan Stanley. It does not provide individually tailored investment advice and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The strategies and/or investments discussed in this article may not be suitable for all investors. Morgan Stanley recommends that investors independently evaluate particular investments and strategies, and encourages investors to seek the advice of a Financial Advisor. The appropriateness of a particular investment or strategy will depend on an investor’s individual circumstances and objectives.
Tax laws are complex and subject to change. Morgan Stanley Smith Barney LLC (“Morgan Stanley”), its affiliates and Morgan Stanley Financial Advisors and Private Wealth Advisors do not provide tax or legal advice and are not “fiduciaries” (under the Internal Revenue Code or otherwise) with respect to the services or activities described herein except as otherwise provided in writing by Morgan Stanley and/or as described at www.morganstanley.com/disclosures/dol.
Individuals are encouraged to consult their tax and legal advisors regarding any potential tax and related consequences of any investments made under an IRA.
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