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The 2 Phases of Managing Your Retirement Portfolio

You’re faced with a lot of choices when planning for retirement, but breaking your approach into two phases can help simplify the decisions you need to make.

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All the individual considerations of retirement planning can make it a challenge to develop any specific “must-follow” rules.

401(k) plans are a good example. Taking a 401(k) matching contribution from an employer is about as close to an “automatic” retirement planning decision as you’ll find. But only about 40% of employers offer matching contributions.

It’s tough to classify it as a “must-follow” rule if it doesn’t apply to most investors. And it doesn’t get any easier.

Should you contribute to a Roth or traditional IRA? It depends on your income, time to retirement, marital status, and even how much income you expect in retirement, which could be years or decades away.

Even using tax-advantaged plans as the primary vehicle for retirement planning has become controversial lately, as participants in the FIRE (Financial Independence, Retire Early) movement are finding themselves with too much money in tax-advantaged plans and facing penalties for early distributions. (Although, for most investors, maximizing your retirement savings is still a smart approach.)

Given how individually specific a lot of this can get, one useful tactic is to break down your retirement planning by which of two phases you’re in (that, and talk to an accountant if you need guidance on the tax implications).

Generally, there are two phases of retirement planning: accumulation (when you’re saving money for your future) and distribution (when you’re relying on your retirement savings to carry you through your golden years). So, let’s start there.

Accumulation Phase

This phase encompasses your working years when you set aside excess savings to build wealth for later in life.

The most important step in the accumulation phase is maximizing your savings while fine-tuning how you contribute (and invest) to your personal situation.

One of the best options for early savers is an employer-sponsored plan because plans like 401(k)s are the only saving method that may offer you a matching contribution from your employer (this can also be true of 403(b) plans). It’s a benefit you simply cannot get on your own.

As a general rule, if your employer offers matching contributions, you should contribute at least that much (usually capped at a percentage of your wages) to take full advantage of those matching contributions.

Once you’ve done that, additional contributions to an employer-sponsored plan can still offer a benefit over contributing to an IRA, namely, contribution limits.

For 2024, you can contribute $7,000 to an IRA ($8,000 if you’re over 50; tax benefits will depend on your income), whereas employer-sponsored plans allow contributions of up to $23,000.

Roth or Traditional

One of the most common questions investors have when managing a retirement portfolio is whether to contribute to a Roth or traditional retirement account.

Roth contributions are made with after-tax dollars and grow tax-free, whereas traditional contributions are made with pre-tax dollars and grow tax-deferred. (Roth IRA contributions have eligibility requirements based on your income.)

Roth IRAs also offer additional flexibility in the case of early distributions.

As a general rule, contributing to a Roth (IRA or 401(k)) is most beneficial if you are at a lower tax rate at the time of contribution than you’ll be at the time of distribution.

A long time horizon (decades not years) can push the math in favor of making a Roth contribution, even if you’re at a slightly higher tax rate than you anticipate in retirement. But, generally, you don’t want to be making Roth contributions if you’re in your peak earning years and are nearing retirement.

Investing While Accumulating

As far as investing goes, if you’re early in the accumulation phase you can afford to take more risk. That generally means more exposure to equities and less exposure to fixed income. Since you may still have many years before retirement, you can weather more volatility (from stocks) in exchange for greater returns over time.

That doesn’t mean 100% equities or concentrated positions in individual stocks, but you can take additional risk.

Generally, you should periodically rebalance your portfolio (quarterly, semi-annually, annually) or use something like a target-date fund that rebalances your equity/fixed-income blend automatically.

As you approach retirement, the benefit of stock exposure (more upside potential) is eclipsed by replacement risk (if you lose 20% of your equity allocation because of a bear market and you’re nearing retirement, there’s no way to replace those funds).

To mitigate those risks, most financial advisors recommend reducing your equity exposure in favor of fixed income and cash.

Distribution Phase

Once you’re past your peak earning years and are nearing retirement, you need to take a hard look at what you’ve saved and whether it will allow you to achieve your retirement goals. Retirement planning calculators can be particularly useful at this time. If you’re not quite where you feel you should be, consider taking advantage of catch-up contribution limits or working a few more years if you’re able to.

When you’re in the distribution phase, it’s more important to manage your retirement portfolio for asset safety and income. If you’re no longer working, it’s impossible to replace retirement assets. So, unless you’ve accumulated significant retirement savings and are more concerned about legacy wealth (what you leave for beneficiaries, your estate, etc.), financial advisors generally recommend reducing your equity exposure.

As far as distributions go, a useful rule of thumb at this stage is the 4% rule. Put simply, try and avoid drawing down more than 4% of your retirement savings each year. That’s generally viewed as a safe threshold where the returns on your retirement assets should be enough to replace your withdrawals.

There’s no guarantee, of course, but a conservative blend of cash, fixed income and equities should allow you to achieve 4% returns annually.

We recommend you speak with an accountant or financial advisor for guidance on your specific situation, but these guidelines on should offer a good place to start.

Brad Simmerman is the Editor of Cabot Wealth Daily, the award-winning free daily advisory.