Retirement phases

While there may be many twists and turns in the road, our financial lifecycle is linear. As we age, financial priorities progress through three phases: Grow, Protect and Spend. It’s possible that as we move forward, we can be in two segments simultaneously, e.g., Protect and Spend or Grow and Protect. On the path to financial security in retirement, you’ll want to maximize each phase to help avoid bumps in the road. The stakes are high, and to succeed you must have a plan. Let’s explore each segment in more detail.

GROW

Why is growth important?

Growing your money is important throughout the journey to retirement – especially in the early years. Growth is the engine that drives wealth creation and may also help you keep pace with the cost of living. When we’re older, we hope that a larger pool of money may generate more income as you move into the later spend phase. A part of your portfolio should always target growth, although it might be less of a focus as you age.

Navigating the waypoints

When you put a plan in place early in life, saving becomes part of your routine. Pay yourself first by maximizing contributions to retirement plans and other savings products. Your future self will thank you. While younger investors can be more aggressive in their holdings, we must be mindful about portfolio allocations and associated levels of risk as we age. It’s clear, however, that no matter what phase you’re in, you’ll want to consider opportunities for growth.

Your feelings about growth

Growing your retirement savings can help you feel optimistic, proud, smart, responsible and in control of your finances.

PROTECT

Why is protection important?

As your money grows, there’s more at stake. As you get closer to planning for the spend phase it may make sense to pump the brakes a little on your more aggressive holdings and make sure you’re investments are in line with your risk tolerance. Contrary to our younger years, we may not have the time to recover and replenish what might be lost in a downturn. Keeping a watchful eye on risk may be prudent in both the protection and spend phase.

Navigating the waypoints

Is your portfolio overweighted to investments that carry more risk? Rebalancing your portfolio and looking for ways to appropriately protect what you’ve amassed makes sense. Keep in mind, when you enter the spend phase you might not have a salary to cover living expenses. While growth is still important, it’s also important to look for products that can provide protection for your money and future income.

Your feelings about protection

Protecting assets can help you feel safe, secure, prepared for adversity, relaxed about your goals and reassured about your future.

SPEND

Why is spending important?

You still have bills to pay – they won’t retire when you do. Think of expenses as either “essential” or “non-essential.” Food, utilities and healthcare costs are good examples of essential expenses. Non-essential expenses are things like hobbies and travel that can be dialed back when needed. Will you be ready to make those payments when you don’t have a paycheck coming every two weeks?

Navigating the waypoints

Your 50s are a smart and responsible time to start thinking about and planning for income needs in retirement. Start by projecting your income and expenses – it may be difficult to look 10-15 years in the future, but it will be an excellent first step. Next, consider supplementing Social Security by exploring investments that can also provide protected lifetime income – running out of money in retirement is not an option. Luck favors the prepared.

Your feelings about spending

You want to feel independent, free to live as you choose, in control of your finances and grateful to maintain your lifestyle – even if you live to an advanced age.

HOW ANNUITIES CAN KEEP US ON TRACK

An annuity is a financial product that provides a stream of payments over a specified period, either for a fixed term or for life. There are several types of annuities, but they generally fall into two main categories: fixed and variable.

Pros of annuities:

• Guaranteed Income: Annuities, particularly fixed annuities, offer a guaranteed stream of income, providing financial security, especially in retirement. You know how much you'll receive and when.
• Tax Deferral (for some types)
• The growth within a tax-deferred annuity isn't taxed until you start receiving payments. This allows your investment to grow tax-free for a longer period.
• Protection from Market Volatility (for some types)
• Fixed annuities offer protection against market downturns. Your principal is generally safe, unlike investments in stocks or mutual funds.
• Potential for Growth (for some types)
• Variable annuities offer the potential for higher returns than fixed annuities, although this comes with higher risk.
• Estate Planning Tool: Annuities can be structured to benefit beneficiaries after the annuitant's death.

Cons of annuities:

• High Fees: Annuities often come with high fees, including surrender charges (penalties for withdrawing money early), administrative fees, and mortality and expense risk charges. These fees can significantly eat into your returns.
• Lack of Liquidity
• Accessing your money before the annuity's payout period can be difficult and expensive due to surrender charges. You may face significant penalties for early withdrawals.
• Limited Access to Principal: In some cases, you might not have access to the original principal invested until the annuity starts making payments. 
• Complexity: Annuities can be complex financial products, making it difficult for some individuals to understand the terms and conditions. Misunderstanding the terms can lead to costly mistakes.
• Inflation Risk (for some types)
• Fixed annuities might not keep pace with inflation, meaning the purchasing power of your payments could decline over time.
• Market Risk (for variable annuities)
• Variable annuities are subject to market risk, meaning the value of your investment can fluctuate and even decline.

In summary, annuities can provide valuable guaranteed income and tax advantages, especially for retirement planning. However, it's crucial to carefully weigh the high fees, lack of liquidity, and complexity before investing. It's highly recommended to consult with a qualified financial advisor to determine if an annuity is the right investment for your specific financial situation and goals. 

Annuities are unique because they offer benefits not found in other financial products. The table below provides additional ways annuities may help investors in each phase.