When it comes to defining the best solution for this task, there are two major camps – and they rarely see eye-to-eye.  In one corner are the total return proponents.  They believe the optimum approach is to manage the portfolio for total return.  They assume the income generated by the portfolio will not be sufficient to cover retirees’ annual financial needs and therefore some holdings will need to be sold to make up the shortfall. 

In the other corner is the dividend income camp.  That camp believes the optimum approach is to invest strictly in dividend generating securities that kick out the required income without ever having to sell any holdings.  The dividend camp makes some compelling arguments, but that is a subject for another article.

Today, I want to focus on what I see as the single largest flaw of the dividend crowd:  They do not acknowledge the fact that dividends can and do experience declines.  This failure results in not having a thoughtful plan for those occurrences.

Let’s take some real-life examples.  We need some basic assumptions, so we’ll start with the widely accepted 4% rule for first year withdrawal.  If you are not familiar with the rule, it puts forth that to minimize the chance of outliving your nest egg the most you can withdraw from your portfolio balance the first year is 4% and that amount can be adjusted upward each year for inflation.  There are numerous variables and it won’t work for every situation, but it is a good starting point.  If you start with $1 million and assume a 3% inflation rate, then the 4% rule says you can withdraw $40,000 the first year, $41,200 the second year, and so on.  The withdrawal amount is independent of your portfolio balance in subsequent years.

The total return investor probably holds a mixture of stocks and bonds, and the portfolio may only throw off about 2% in dividends.  The total return investor is counting on portfolio growth to stay ahead of inflation and to cover the shortfall in annual income needed versus dividends received.

The dividend investor requires a 4% initial portfolio yield.  This approach requires sufficient dividend growth to allow future distributions to keep pace with inflation.  The major flaw with this approach is that there is nothing sacred about dividends and they can be decreased, thereby creating the necessity for the devout dividend investor to convert to a total return investor at an inconvenient time. 

I have prepared the following table as a case study.  It clearly illustrates that dividend investment strategies can and do experience severe declines in dividend payouts.  The largest dividend ETF, iShares Dow Jones Select Dividend ETF (DVY), had a 31.4% reduction in dividends from 2008 to 2009.  The 2010 per share distribution amount was 29.8% below the 2008 level.

Income From Largest Dividend ETFs 2008-2010

Table sorted by assets under management. Annual ETF dividend income data from Morningstar.  Current yield data from Ned Davis Research.  Data compilation by InvestWithAnEdge.com.

Let’s assume a person embarked on a dividend-based withdrawal plan in 2007 or 2008 and bought enough shares of DVY to supply $20,000 in annual dividends in 2008.  That person planned on dividends rising by 3% to $20,600 in 2009 to offset inflation.  Instead, they received only $13,719 from DVY.  They couldn’t make up the difference with other dividend ETFs because, as the table clearly shows, most of the others were just as bad, if not worse.

Our dividend investor is left with no choice but to sell some holdings to make up for the income shortfall.  To add insult to injury, the dividend streams still have not returned to their prior levels, forcing the dividend investor to sell again in 2010 and 2011.  Even if dividends remarkably return to 2008 levels in 2012, our dividend investor has sold off a portion of the portfolio plus experienced four years of inflation, and therefore portfolio level dividends will still be insufficient.

One argument I expect to receive is that these ETFs are not good examples because they don’t own the best list of dividend stocks.  My counter argument would be that the underlying indexes are created by knowledgeable experts.  Any list that you generate today, consisting only of companies that have never cut their dividends, is a list that suffers from extreme survivor bias.

Another argument might be to put it all in the Vanguard Dividend Appreciation ETF (VIG) since it had a smaller decline and has already fully recovered.  However, VIG and similar strategies only generate about a 2% yield – far short of the 4% needed.

If you are going to point out that the yields on these ETFs actually increased in 2009 (their prices fell more than their dividends), my counter argument will be that it doesn’t matter to our 2008 retiree.  Current yield only matters to new money being invested.  By definition, our investor is in withdrawal mode and not accumulation mode.  He has no money to invest at these new lower prices and higher yields.

Disclosure covering writer, editor, and publisher:  No positions in any of the securities mentioned.  No positions in any of the companies or ETF sponsors mentioned.  No income, revenue, or other compensation (either directly or indirectly) received from, or on behalf of, any of the companies or ETF sponsors mentioned.

When considering where to retire, there are a few major thoughts to ponder – retirement savings is not the singular concern that will drive this decision.  If you’re thinking about resettling somewhere during retirement, here are the top 5 things to think about:

1) Friends and Family

Life is more about relationships than location.  Since retirement is just another phase of life, friends and family will continue to play a big role.  You may be able to see your loved ones more often if you live nearby.  Ask yourself how important is it to be able to visit them frequently.  If they aren’t close by, do you enjoy making new friends?

2) Cost of Living

For most people, affordability is the single biggest factor in deciding where to live during retirement.  If your current locale is too expensive, consider other areas of the country – or even out of the country.  Some of the more affordable US retirement spots can be found here: Best Retirement Spots: Cost of Living & Taxes during Retirement by State

3) Climate

If you like mild winters, the South is much better than New England or the Midwest.  If you’re shooting for cooler summers, a northern location may be more advisable than Phoenix, Arizona.  Whatever your thoughts on climate, do your research before buying into a community.  You’ll want to like it year-round unless you intend to migrate with the seasons.  Here are some good lists: Money’s Top 100 Best Places To Live & Money’s 25 Best Places to Retire

4) Cultural Activities

One of the major differences that retirement affords is time.  Now that you’re not working a full complement of hours, you’ll have time to take in more leisure activities, volunteer, or do other things that you couldn’t during your working years.  If you like to travel, make sure you’re near an airport.  If you like the opera, then Lubbock, Texas may not be the optimal place for you.  Check out the activity options in your chosen location before you call a realtor.

5) Proximity to Healthcare

Unfortunately, the older we get the more medical attention we require.  Often the care we need is more intense and urgent than when we were younger.  Living in the mountains or on a secluded beach may look great in pictures, but make sure you are not putting your health in jeopardy by being too far away from quality medical care.  Consider what medical facilities you may need during retirement.

These are some general guidelines to consider if you’re thinking about relocating during retirement.  To get even more specific, check out US News’ Best Places to Retire Tool.

If the size of your nest egg is a concern for you retiring comfortably in the United States, you might consider a place where your savings can go much further.  You know how much things cost in the US – but did you realize there are places where your dollar can go up to 4 times further?

You don’t have to go to the “Third World “ or give up all the comforts of America.  Many foreign retirement destinations have Internet connectivity, satellite TV, golf, beachfront property, and other amenities you are accustomed to – at a deep discount.  Granted, you may be a couple of plane trips away from the U.S., but the cost savings and new adventures may be enough to overcome any inconvenience.

For example, US News recently highlighted a couple, Jason and Elizabeth Pearce, who retired to Belize.  The Pearce’s live on Jason’s Social Security alone, allowing Elizabeth’s to go into savings.  They have a house on the ocean, a maid, a gardener, the Internet, and have made new friends.  They are enjoying a far more comfortable retirement than they could have afforded in the U.S. or Canada.

Here’s the sample budget for the Pearce’s in Brazil:

• Rent: $300
• Utilities, telephone, and Internet: $500
• Groceries: $150
• Health insurance: $50
• Entertainment: $100
• Car expenses: $300

However, Belize is not the only country that offers cheap living with home style amenities.  Other popular expatriate destinations abound in Latin America: Chile, Costa Rica, Ecuador, Guatemala, Honduras, Mexico, Nicaragua, Panama, and Uruguay.  Granted, you may need a few Spanish classes before you go, but it’s a small price to pay.

If you’re feeling more adventurous, look to a different hemisphere. Cambodia, Laos, Malaysia, Philippines, Thailand, or Vietnam all offer a similar experience to retirees, but in a less-familiar environment.  English will be spoken less in these areas, but that’s a challenge met by most retirees going abroad.

Before you buy plane tickets, do some planning.  Consider healthcare coverage, cultural differences, and the differences in legal systems.  Check out Retired Expat for more information on foreign living.  They cover a variety of overseas retirement issues if you’re considering that route.  For a more luxurious experience, you can always subscribe to one of the pioneers in the overseas living arena: International Living.

Living abroad is certainly not for the majority of folks looking to retire, but for a select few, it could be a great way to reduce your cost of living while providing a brand new adventure in retirement.  Just be sure to pack the sunscreen.

1.  Good Health – This is fairly obvious.  The healthier you are, the better you feel.  But strongly consider how your health will also influence your retirement costs.  What kind of health problems do you currently have?  What will treating them cost in the future?  What’s my family history?  What kind of supplemental health insurance options are available to me?  Should I consider a Long-Term Care policy?  The answers to these questions and more can cause huge waves in your retirement.  Consider them early and before they rear their ugly heads.

2.  A Significant Other – Partners are important, but many people plan only from their own point of view.  Their partner’s considerations are sometimes left out of the equation.  Many decision makers can’t imagine a time where they’re not making decisions for their family or their partners.  But what happens if you were to pass first?  Are the appropriate instructions and arrangement in place?  What if you lose the mental acuity to manage your portfolio?  Who takes over?  Does your partner share the same investment sensibilities as you?  Do they have a support system or would they do it on their own?  Should you consider trustee services?  Would professional management services be appropriate?  You are not Superman.  Unfortunate things can and do happen, so ensure you taken care of your significant other if they don’t enjoy financial duties.

3.  A Social Network and Don’t Be Addicted to Television – Staying active is great advice for retirees.  In other words, have friends and get of the house, don’t stay home all day anand watch House (a fine show, BTW).  What will your life look like?  Will your social activities and hobbies involve large expenses?  Will you be travel a lot?  Play golf 5 times a week?  Is working with charitable organizations important to you?  All these questions are personal, but your retirement plan will need to address them.

4.  Intellectual Curiosity and Addiction to Achievement – One is encouraged, the other is not.  However, both can manifest in similar ways.  For those that like to be challenged or define their lives with their professional status, a second career or part time work is common.  Consider this in your planning.  Do you like to work?  Is there another career that you would like to pursue?  What kind of income will it generate?  If you go into a full-time second career, are benefits available?  How will this affect your savings plans?  What are the tax implications?  Some retirees start managing their portfolios with gusto as a substitute to their career pursuits.  Is this wise? Is it healthy, for you or your portfolio?

Retirement is a concept that everyone imagines, but few embrace.  Use these lists to think about the realities of life in retirement.  A good rule of thumb is to write down your visualized retirement.  Record your concerns and expected challenges.  This can help you to start addressing the pertinent questions necessary to enjoy your retirement to it’s fullest.  If you work with a planner or advisor, this exercise can be incredibly helpful to them.  They can build a plan for you with your image of retirement in mind.  After all, retirement should be as stress-free as possible.  Planning in advance will be a big help in this pursuit.

Currencies are unlike other assets.  For instance, currencies are used for monetary exchange across the globe.  People don’t buy groceries with gold coins or mutual funds in France – they use Euros.  That’s the way we usually think about currencies.  But currencies can do more than buy groceries.  If you’re a US-based investor, your investment account can gain value when holding a currency that appreciates against the US dollar.  Your account can also profit while a currency is going down if you sell-short in that currency.

All of the major world currency values float against each other, though some float less than others (ex. Chinese Yuan).  Investment managers use these major currencies to diversify investment accounts.  The major currencies ranked by trading volume are:

1. US Dollar (USD)
2. Euro (EUR)
3. Japanese Yen (JPY)
4. British Pound Sterling (GBP)
5. Swiss Franc (CHF)
6. Australian Dollar (AUD)
7. Canadian Dollar (CAD)

Investment managers buy or sell currencies in various ways.  The easiest and most cost-effective way to hold currencies is through ETFs.  The most popular are CurrencyShares from Rydex.  There are several competitors, but none have the trading volume that Rydex has garnered.

For example, an investment manager could use a currency ETF when he sees weakness in the US market.  If he observes a stronger Japanese market in the intermediate-term, he could buy CurrencyShares Japanese Yen Trust (FXY).  If he’s right, the investment would appreciate as the US Dollar fell versus the Japanese Yen. FXY would go up since the ETF is priced in Dollars.

Another way investment managers use currencies is through non-US dollar savings accounts.  Like any bank account, you deposit money in a bank and receive a rate of return.  But unlike other bank accounts, the funds are counted in a different currency.  Your deposit will fluctuate in value if that country’s currency fluctuates while your cash is on deposit.  There are various risks associated with this strategy, so make sure your investment manager is doing his homework.  If you want to make international savings deposits yourself, check out Everbank.

By the way, if you’re curious about how the Dollar matches up with other currencies, check out these exchange rates.

Funds aren’t an asset in themselves; they are vehicles that help you invest in various asset classes.  Traditional mutual funds are a collection of securities that are actively managed by an investment manager and his team.  They often compare themselves with investment indexes of similar asset classes.  Mutual funds have evolved over time, and now some invest in a multitude of assets, some buy other mutual funds, and others simply track an investment index.  Mutual funds are typically bought for the benefits of diversification, professional management, and low capital outlay.  Many kinds of mutual funds can be expensive to own and cumbersome to sell.

Here are some of the fees mutual funds can charge:

• Management Fees – (normally 0.5%-2.0%) this is how mutual fund companies pay their fund investment managers and staffs.
• 12b-1 Distribution Fees – (0.25% and 1.0%) for marketing to new prospects.
• Administrative Fees – (0.20% – 0.40%) to keep the lights on at the office, paper in the copier, etc.
• Sales Loads – (3.0% – 5.75%) Also known as sales commissions, they are used to pay the sales force who sell the funds.
• Exchange Fees – Additional fees you can incur if you decide a mutual fund no longer matches your investment objectives.

If you buy a mutual fund with a sales load, your investment has to dig itself out of a hole before you can make a penny.  That sort of expense is a big drain on your rate of return.  Ensure that you evaluate the cost against the value you’ll be receiving when considering a purchase of fund.  You can also purchase mutual funds that have no sales charge (load).

An alternative that has been making tremendous strides to mutual funds in the last decade are ETFs.  ETFs, short for Exchange Traded Funds, are collections of stocks, bonds, or other assets. They can track a number of different underlying indexes such as the S&P 500.  The increasing popularity of ETFs has provided a large menu to choose from.  Whatever kind of investment pool you’re looking for, there’s a good chance at least one ETF tracks it.

ETFs are similar to mutual funds in being pooled investments, but have some enormous advantages.  Often, the expenses are fractional in comparison to funds, so you don’t have to waste your hard-earned savings on fees every year.  The average ETF charges 0.1% – 0.65% annually.  This can mean enormous savings over time.

An added benefit is that ETFs provide up-to-the minute pricing while the market is open.  You don’t have to wait for end of day pricing, common with most mutual funds. You can buy and sell an ETF knowing the price you’ll pay.  ETFs also tend to be more tax-efficient.  The passive management of index investing coupled with the lack of pass-through taxes, inherent in most active mutual funds, can reduce your tax headaches.

ETFs still have their challenges.  Light trading volume or shallow markets can affect the pricing of some ETFs.  In addition, transaction costs can add up if you’re a high frequency trader, although there are ways to reduce these expenses.  Some other features such as automatic dividend and capital gain reinvestment that are available in funds, are not generally possible in ETFs.

Pooled investments are an important tool for a majority of investors.  The uniqueness and benefits of mutual funds and ETFs are stark compared to individual securities.  If you’re constructing a portfolio and you want to buy a diversified block of assets, mutual funds and ETFs are great options.  The benefits they provide can be paramount to a successful portfolio.

Client Objectives

Every investor is different. While many may have similar goals, all have unique circumstances. Some might be looking forward to a retirement full of international travel and posh leisure activities. Other investors’ objectives may be more modest in nature, but no less important. Whatever the goal, good investment managers start by understanding their client’s objectives. Then, they put together an investment plan that will seek to meet these objectives while minimizing the risks associated.

Portfolio Construction

A big part of the investment plan is asset allocation, which is using different asset classes to construct a portfolio designed to meet client objectives. These asset classes are varied. They include cash, stocks, bonds, commodities, real estate, insurance, and more. Experienced investment managers use many or all of these asset classes in varying degrees to build portfolios for their clients.

Hypothetical Asset Allocation

To illustrate how asset allocation can work, we have a very simple, hypothetical case: Sam and Sally. Sam, 40 years old, is married to Sally, also 40, and they have no children.

They enjoy what they do, but both want to retire when they are 65. They plan to travel extensively and prefer to relocate to the beach upon retirement. That gives them roughly 25 years to make their world traveling, beach living retirement a reality. Both are comfortable with taking on higher-risk for the potential of more growth in their investments, so they are okay with greater volatility.

Understanding Sam and Sally’s objectives and risk tolerance is crucial for determining how to deploy assets in their portfolio, and typically there’s a lot to work that goes into determining the proper asset allocation. Let’s go forward with the understanding that this extensive planning process had been completed because the point is to illustrate the difference in asset allocation models at different stages in life. A reasonable asset allocation mix over time for Sam and Sally may be:

Phase 1: Age 40-55

• Allocate 60% in stocks, 15% in commodities/real estate, 20% in bonds, 5% in cash.
• Continue to work, receive average raises in relation to inflation, and save 15% of their income per year before taxes.
• Monitor and rebalance portfolio every year for the best in class assets, but do not adjust overall strategy unless investment goals change.

Phase 2: Age 55-60

• Start re-allocating to a 50% stocks, 30% bonds, 10% commodity/real estate investments, and 10% cash portfolio.
• Monitor and rebalance portfolio every year for the best in class assets, but do not adjust overall strategy unless investment goals change.

Phase 3: Age 65+

• Start re-allocating 30% in stocks, 50% in bonds, 10% in cash, and 10% in commodities/real estate investments.
• Monitor and rebalance portfolio every year for the best in class assets, but do not adjust overall strategy unless investment goals change.

As this couple gets closer to generating income from their portfolio, their investment approach transforms from a growth portfolio to an income portfolio and you can see how their portfolio is restructured over time to reflect this. Still, at no time is their plan one of extremes. There is always a growth component and conservative component, just of differing degrees to reflect their needs in life.

Real retirement plans should never be all in one asset class, whether in growth mode or income mode. You need the proper balance to protect your plan from the multitude of risks out there. Additionally, you’ll notice this asset allocation schedule roughly follows the Three Phases of Retirement Investing. Asset allocation is fundamental to investment planning, and although there are different ways to be successful in managing your investments, it remains a staple of how to reduce risk.

If you direct your own investments, asset allocation is one of the first things you should consider.  Some people learn this the hard way.  In an effort to get rich quick, they fall into investing all their money into one asset – often stocks or real estate.  Sometimes it works out.  Most of the time, it works against you.  Without proper asset allocation, you could lose your entire investment portfolio on a risky bet.

Even if you want to live on the interest from a million dollars, it’s important to consider wise asset allocation as soon as you start investing.  But before you do that, it’s good to define the components of asset allocation.  Investment managers use these categories to construct portfolios.  The snapshots below explain what they are and what sort of risk to expect from each:

1) Cash or Cash Equivalents

The most common asset class is cash.  Cash generally includes any cash saved above what you need from a transactional basis.  This can include your savings account, your money market account, and even the physical savings bonds kept in your dresser (Note: You should always keep anywhere from 6-12 mo cash aside for emergency basis).  Foreign currency is also considered a type of cash, although it’s often distinguished in asset allocation.  Cash is a low-risk, low-return asset, typically used to offset some of the riskier parts of your portfolio.

2) Stocks or Equities

Stocks are shares of ownership in a company.  Stocks can be subdivided in numerous ways including small-cap vs. mid-cap vs. large-cap relating to the size of the company.  Sometimes they are categorized by their growth-orientation (value vs. growth).  A distinction between domestic stock and international or emerging market stocks is also common.  Most of the financial press is focused on stocks.  Stocks historically have offered greater return opportunities but also great risk and volatility.

3) Bonds

Bonds are debt securities.  They are formal contracts that governments or companies issue to borrow money that will be repaid with interest at fixed intervals.  If you’re a bondholder, you have lent your money to someone because you expect to get a stream of interest with your principal back at a later date.  Bonds have traditionally offered less return than stocks over time, but also less risk and volatility.

4) Commodities

Commodities are physical assets that are traded on the capital markets.  These include corn, soybeans, gold, platinum, cotton, oil, natural gas, pork barrels, etc.  Commodities are usually higher risk assets, but are especially high-risk in the leveraged futures markets.  Although volatility can be very high with commodities, they are useful as an asset class that is less correlated with stocks.

5) Insurance Contracts

Insurance contracts include any annuities or life insurance.  They can be considered a growth or income asset, but are generally used for eventual income planning purposes.  Both kinds of contracts can be invested in fixed return or use market instruments to fuel growth.  Insurance contracts also have an additional risk, since they depend on the solvency of the issuer.

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There are three other types of assets that qualified investment managers can invest in: Real Estate, private businesses, and special collections.  Each of these requires a different skill-set and knowledge base, but they are still legitimate assets to be considered in asset allocation.

The goal of capital distribution is NOT to outlive your retirement nest egg, but to maintain the desired lifestyle for you and your loved ones through your non-working years. Capital distribution (not to be confused with capital gains distribution) is about spending your retirement savings the best way for your unique situation.  Here are three common strategies:

1) Annuities

One way to generate income during your retirement is with an immediate annuity, sometimes called an income annuity.  This is not the same as a fixed or variable annuity. An immediate annuity is similar to a self-funded pension. You deposit a chunk of cash with an insurance company and they pay you a certain dollar amount over a period of time. There are different distribution options related to spousal benefits, number of payments to be made, immediate or deferred payments, etc.  No matter the options chosen, the mechanism is the same: give an insurance company some money, and they pay you back every month until you and/or your spouse die.

The risks of this approach can relate to your life span, market risks, performance risk, and whether the insurance company stays solvent. Also, if you die after receiving the first payment, your family may lose the majority of your initial deposit if you did not cover that contingency in the annuity contract.

In addition, a typical annuity payment is fixed even if the market goes up. You may find you have given up some potential opportunities for growth. Finally, you must consider the risk that the insurance company may go bankrupt and will no longer make good on their end of the contract. Annuities can be an effective capital distribution method, but they’re not appropriate in all situations.

2) Systematic Withdrawals

Another way to finance your retirement is through systematic withdrawals.  There are two main methods: constant dollar and constant percentage.  Just as you once saved money systematically and let dollar cost averaging work for you, so also you can systematically pull money from your retirement account on a monthly, quarterly, semi-annual, or annual basis.  The constant dollar withdrawal plan has the benefits of convenience and consistency.

However, there can be a major risk with constant dollar withdrawals.  When you withdraw money from your retirement account during a bear market, you’re locking in a permanent loss to your portfolio. Some advisors suggest that this method, known as “reverse dollar cost averaging,” can be a great detriment to your portfolio when you make withdrawals during a bear market – which you almost certainly will if you live long enough.  So beware of the additional risks associated with constant dollar withdrawals.

Another systematic withdrawal option is the constant percentage method.  Instead of consistently taking out the same dollar amount, regardless of economic climate, you take out a constant percentage, thereby limiting your realized losses in a falling market and not compounding the losses to your nest egg.  The risk is that very few people want their retirement budget to be a slave to the market.  Less consistency in income streams means less ability to plan future life events.

3) Strategic Withdrawals

The final type of capital distribution is a strategic withdrawal of retirement savings.  There are several ways to implement this method. For instance, you can categorize your savings in buckets: low-risk, medium-risk, and higher-risk investments. A strategic withdrawal would be pulling funds from a lower-risk investment regardless of where the market is.  This reduces the negative effects of market risk on your retirement savings.  The risk is that this strategy requires some sort of market-timing plan.  It takes more time and expertise and is far from full proof.

Building a retirement income plan is one of the most important investment decisions that you’ll consider.  While these are three conventional methods used, they certainly aren’t the only ones.  Like most things in life, generally one size does NOT fit all.  Mixing a few of these methods or others may be the optimal blend for your income plan.  Also, often the right method is dependent on the type of assets you’ve saved: individual securities, pooled investments, employee pensions, or a mixture.  All have benefits, but all have risks as well.

Before implementing any of these strategies, discuss your situation with a qualified investment advisor. A professional can guide you through different ways to distribute your assets during retirement so you don’t outlive your savings.

There are three distinct phases of retirement investing. Understanding and implementing them will help you plan for retirement on your terms.

Phase 1: Capital Accumulation

The first phase of retirement investing is usually the longest. This is the period when you save and grow your savings as much as possible with the appropriate risk. The Capital Accumulation phase can last decades during your working years as you patiently build up an investment portfolio. This phase can be shortened if you save more, or your investments perform especially well. It can also be reduced if you get a large cash infusion from business deals, inheritance, or possibly winning the lottery.

As we are painfully aware, investments don’t always grow. That’s why it’s important to match your growth strategy with your risk tolerance during the Capital Accumulation Phase.  If you shoot for double-digit returns every year, inevitable corrections will probably eat away at your desired rates of return. This is just one of the things to worry about while you are accumulating your nest egg.

Phase 2: Capital Preservation

The second phase of retirement investing relates to keeping your retirement savings intact. During the first phase you were trying to grow your nest egg to a certain amount. During this phase, your goal is to keep what you have gained. You may still be saving, but it’s probably not as much as you were in previous years.

Phase 2 usually starts 3-7 years before your expected retirement and lasts until Phase 3. It’s important to back off your risk appetite during the Capital Preservation phase. Your goal at this time is to maintain your savings with some modest growth to keep up with inflation. You don’t want to make any last-minute mistakes just before retirement.

Phase 3: Capital Distribution

Finally, Phase 3 begins when you start spending your accumulated savings. The goal in this phase is to make sure your nest egg lasts as long as you do. Hopefully, your retirement savings will supplement Social Security, pensions, or other income streams. Regardless, it’s important to make sure you don’t have more life at the end of your money. Preparing well during the first two phases makes the all the difference at the end.