As you approach retirement, it can be helpful to think about your current plans, the lifestyle you have in mind and any factors that might be standing in your way. Rather than planning your life around your money, plan your money around your life.
The Next Chapter of Your Life: Planning for Retirement
Whatever your unique vision for retirement looks like, proactive planning is the first step in bringing it to life.
Envisioning Your Retirement Lifestyle
A first step in preparing for retirement is defining what retirement means to you and answering some important questions. When do you want to retire? How will you spend your time in retirement? Can you afford long-term care if you need it? Will you need to care for your parents or other loved ones? Are there charities you want to support?
Articulating your retirement vision helps you set concrete goals and determine how much income you will need to achieve them.
Understanding the Risks to Your Retirement
As you map out your road to retirement, consider the following factors:
Longevity. With advances in medicine and increased emphasis on wellness, people are living longer, healthier lives. As a result, many people underestimate their lifespan and the risk of outliving their assets. When building up your retirement income, allow for the possibility of living longer than you expect.
Market Risk. This involves not just the possibility that the market will move against you, but that it will move against you immediately before or after you retire and begin withdrawing assets to meet expenses. However, keep in mind that over the long-term stocks have outperformed other asset classes and therefore may still have a place in your investment strategy. 1
Inflation. If your assets do not grow as fast as the inflation rate, you could lose some of your purchasing power. Consider allocating a portion of your retirement portfolio to investments with the potential to outpace inflation.
Asset Allocation. This is the process of combining various asset classes—such as stocks, bonds and cash equivalents—in various proportions within your portfolio to meet your unique risk preferences and return objectives. As people move toward retirement, the focus of their asset allocation strategy will generally become more conservative, shifting from equities and growth-oriented investments to fixed income and cash equivalents that seek to provide income and capital preservation.
Rate of Withdrawal. Withdrawing too much from your retirement nest egg early on can increase your chances of outliving your assets. Generally, your withdrawal rate should be based on your asset allocation, life expectancy, time of retirement and portfolio value.
Health Care Costs. For many people approaching retirement, potential future health care costs are an area of concern. According to the Centers for Medicare and Medicaid Services, national health-related spending is expected to grow at an average rate of 5.4% annually between 2022 and 2031, reaching more than $7.2 trillion by the end of that period.2 To put that in perspective, in order to have a 90% chance of having enough to cover health care and medical expenses in retirement, a 65-year-old couple with median prescription drug expenses would need $351,000 in savings—not including the additional annual costs of long-term care.3
The Bottom Line
There is a lot to consider when planning for retirement, from defining your goals and determining your income needs to allocating your investment portfolio and adjusting your strategy as your priorities evolve. You may want to consider working with a Financial Advisor and discussing with your legal and tax advisors who can help you with these important tasks.
1 Investopedia, "Which Investments Have the Highest Historical Returns?" Available here: https://www.investopedia.com/ask/answers/032415/which-investments-have-highest-historical-returns.asp(opens in a new tab). Accessed June 10, 2024.
2 CMS.gov, "Projections of National Health Expenditures and Health Insurance Enrollment." Available here: https://www.cms.gov/Research-Statistics-Data-and-Systems/Statistics-Trends-and-Reports/NationalHealthExpendData/Downloads/ProjectionsMethodology.pdf. Accessed June 10, 2024.
3 EBRI, "Projected Savings Medicare Beneficiaries Need for Health Expenses Spike in 2021" Available here: https://www.ebri.org/content/projected-savings-medicare-beneficiaries-need-for-health-expenses-spike-in-2021(opens in a new tab). Accessed September 15, 2022.
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 appropriate 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.
Asset Allocation does not assure a profit or protect against loss in declining financial markets.
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