Prepare for retirement

Here’s something you probably didn’t know: New research shows that close to 90% of retirement income comes from investment earnings during retirement.

Despite the popular idea that retirees’ incomes are generated primarily by pre-retirement investment earnings, the reality is that a retirement portfolio has to keep working long after the owner stops making retirement plan contributions.

It would be easy to draw the wrong conclusions from this research, so it’s important to thoroughly consider the implications.

Portfolio Works

First, it would be a mistake to assume that this finding means any portfolio earnings during retirement can help offset lower contribution levels during your working years. In fact, it’s even more critical to accumulate as much as possible before you stop working because your retirement income will depend heavily on your portfolio balance.

Retiring with insufficient assets means you could be forced to assume too much risk in order to generate enough income to fund the lifestyle you envision.

Next, your asset allocation must be monitored closely, every step of the way, to maintain the appropriate balance needed for portfolio growth, preservation of principal, and avoidance of losses from which you may not have time to recover. Asset allocation is the way in which your investments are allocated among stocks, bonds, and cash. In general, the closer you are to retirement, the less you can afford to assume the higher risks associated with stocks. However, eschewing equities too early can also put you at risk of not accumulating enough to reach your retirement goals.

Finally, if medical science continues to extend life expectancies, or if you have an above-average life expectancy as a result of genetic or lifestyle factors, an even greater percentage of your overall retirement income may need to be generated from investment earnings.

If you are still several years from retirement, keep this information in mind as you periodically review how much of your current income is going toward your long-term financial goals. If you plan to retire soon, it is important to revisit regularly how your retirement portfolio is allocated.