Is retirement on your near-term radar? If so, congratulations! We all deserve our post-career “me time.”
If you do intend to retire in the year ahead, however, there are certain things you’ll want to start doing now, particularly with your retirement savings. Your financial picture will look considerably different once your work-based wages stop. But you want to take your time reshaping your portfolio now, on your terms, rather than be forced to quickly reshape it on the market’s or the economy’s terms when the time comes.
To this end, here’s what to do with your savings right now if you’re going to retire at some point in 2027.
1. Determine if what you’ve got can produce what you need
First and foremost, figure out if the nest egg you’ve got saved up is capable of generating the sort of income you want or need in retirement.
This starts with a budget. Conservatively, some financial planners say plan on spending about 70% of what you spend now once you’re in retirement, although income replacement of about 80% of your pre-retirement outlays may be a more realistic figure.
This is only the beginning, however. You’ll also need to determine whether your savings will meet this spending target. There are several helpful projection tools available online, although as a rule of thumb, withdrawing 4% of a 50/50 (half bonds, half stocks) portfolio every year should allow that portfolio to last 30 years before it’s fully depleted. Of course, this assumes future performance more or less looks like the market’s past. It also assumes you’re going to be smart about your retirement investments, preserving capital at least as much as achieving continued growth.
Along these lines, while the program may be under strain that forces up to a 28% reduction in benefits sometime in the early 2030s, go ahead and ask the Social Security Administration for the amount of the monthly payment you’ll be getting once you claim benefits. Even if these payments are lowered in the future, you’ll at least be getting a few years of 100% of whatever you’re owed.
2. Start shifting from growth to capital preservation
The longevity of your portfolio in retirement largely depends on how you keep it invested. Broadly speaking, you won’t want to be as aggressive then as you may be now simply because there’s no backup plan; going back to work likely isn’t an option. Once that money is gone, it’s gone for good, crimping your portfolio’s income-generating potential for the remainder of your retirement.
This, of course, means more “safe” stocks and less risky growth. While this doesn’t necessarily mean shedding high-profile positions in proven technology names such as Alphabet or Microsoft, an all-or-nothing prospect like pre-profit flying taxi outfit Joby Aviation probably isn’t an appropriate major holding for most retirement portfolios.
Conversely, boring companies such as Coca-Cola or Walmart are arguably in more foundational positions, capable of weathering unpredictable but inevitable headwinds. They also both pay a reliably rising dividend, producing some of the income you’ll likely need in retirement.
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And you’ll want to start doing this sooner rather than later, if you need time to hold out for better prices. If you wait until you’re retired, you may be forced into less-than-optimal entries and exits.
You’ll also probably want to add some interest-paying bonds to your mix. While they don’t offer capital appreciation or payment growth, they offer a great deal of certainty and capital preservation. There’s no universally right mix of stocks and bonds for a retirement portfolio, though a 50/50 or 60/40 (stocks/bonds) ratio is one many retirees are happy with.
3. Make a withdrawal or distribution sequence plan
Generating income and/or continuing to grow your portfolio in retirement is important to be sure. But there’s still another important detail to address. That’s how and when you’re going to remove this money from your savings and turn it into spendable cash.
Generally speaking, you’ll want to spend money from an ordinary, taxable brokerage account first, deferring taxation on withdrawals from tax-deferred retirement accounts for as long as possible. Although you can’t avoid taxes indefinitely, leaving as much money in an IRA as you can allows you to continue achieving tax-sheltered growth for longer, ultimately producing a bigger, better bottom line. Any capital gains taxes incurred on the sale of assets in a taxable account are also likely to be lower than taxes owed on IRA withdrawals, which are taxed as income.
Withdrawals from Roth accounts should ideally come last, if needed at all. There’s no tax implication of these withdrawals, but once money is removed from a Roth retirement account, its continued growth is no longer tax-free.
To this end, if you’re holding a combination of stocks or bonds you intend to liquidate to fund withdrawals, make sure the holdings you intend to sell next are actually in the accounts you intend to draw from.
4. Set up your “buckets”
Finally, in the same vein of properly positioning your accounts and their holdings for exits and withdrawals, you may want to organize all of your retirement savings into different “buckets,” each with a different time-based purpose.
As an example, your short-term bucket might simply hold one to two years’ worth of cash to cover your foreseeable living expenses, while your intermediate-term bucket holds dividend stocks to generate intermediate-term cash flow. Your long-term bucket, meanwhile, could hold the more growth-oriented names you’re willing and able to hang onto for the long haul without touching them. As time marches on, cash and assets will make their way from longer-term to shorter-term buckets.
And to be clear, while your taxable brokerage accounts, ordinary retirement accounts, and Roth IRAs may superficially seem like their own inherent “buckets” (and may well be), this isn’t necessarily always the case.
The establishment of these goal-oriented buckets doesn’t do something you couldn’t mentally do on your own just by keeping careful, thoughtful track of all of your holdings and each of their purposes. This separation, however, certainly makes it easier to mentally manage the ongoing evolution of your entire retirement portfolio.
