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Nearing Retirement? Give Yourself a Financial Check-Up

As you approach retirement, you will quite likely be assessing your financial situation to determine if you have saved and invested enough to afford a comfortable future. Generally, financial professionals advise that to maintain your current lifestyle you will need approximately 70 percent to 80 percent of your current annual income each year in retirement, although your own situation may differ based on your personal goals and finances.

Taking an in-depth look at your finances and an inventory of your retirement funds approximately five to seven years before retiring will give you time to make adjustments to help you meet your goals when retirement time comes around.

Will I Have Enough Retirement Income?

Generally, retirees turn to these sources of income: Social Security benefits; earnings (including part-time jobs); personal savings and investments, including IRA accounts or additional employee savings plans; and company retirement plans.

According to the Social Security Administration, Social Security may account for only about 40 percent of your income in retirement¹. Personal investments and savings, company retirement plans and other sources will have to make up the remaining portion of your income—about 60 percent.

After calculating your projected retirement income, you also need to examine your current expenses and determine which items will increase or decrease, which will be eliminated and which will be added after you retire. By reviewing this information early on, you can develop a sense of whether you’ll have the necessary income to cover your expenses once you retire.

Compare your expense calculations with your projected sources of income and determine whether you will have a surplus or a deficiency. At the same time, determine at what point in retirement you will need to begin drawing on your retirement plan assets. If, after comparing your expenses with income, you have a surplus, you are on the right track to enjoying a comfortable retirement. However, if you note a deficiency, you can make decisions now to help ensure that you will have a relatively comfortable retirement later on.

Should I Adjust My Asset Allocation Strategy?

Having a good understanding of investing becomes more important as you approach retirement. Examine all the investments available through your retirement plan and determine into which category—stocks, bonds or cash equivalents—each of them falls. Next, assess your level of risk. As people prepare to retire, they generally want less risk in their investments than in the past. Since your income from employment will have stopped or decreased considerably and your assets may be invested over a shorter period, it may be more difficult to recover from loss. Therefore you may want a lower-risk investment strategy than before. Whether you intend to use your money over a relatively short period or spread it out through your retirement is another important factor.

Important Points to Consider

There is no set asset allocation strategy that works for everyone. Before determining which strategy best fits your personal situation, keep in mind that different people have different financial resources and expectations regarding how long they will be in retirement. Therefore, individuals have different risk tolerances and investment horizons. And remember, no matter what asset allocation strategy you choose, there is always some level of risk and no guarantee that you will not experience a loss.

Also, keep in mind that you need to look at your holdings as a whole. Consider your personal accounts, retirement accounts and any additional sources of retirement income that you may have. By planning the entire picture you will be better able to develop a portfolio that reflects your immediate and long-term goals. Your financial advisor can help you determine if your strategies are on the right track toward a secure retirement and help you find ways to maintain your position or work toward your goals.

1. Source:  “Income of the Elderly Population Age 65 and Over 2006”, EBRI Notes, Vol. 28. No. 12,  December 2007

Cindy Shively  is a Financial Advisor at Morgan Stanley Smith Barney located in Roanoke VA and is a member of the Meridian Group. She can be reached at 983-4912.

Morgan Stanley Smith Barney LLC and its affiliates do not provide tax or legal advice. To the extent that this material or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law.  Any such taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor.

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