There are 2 phases to retirement planning; the Accumulation phase, or Pre-retirement phase, and the Distribution phase, or Post-retirement phase, and the differences between the two phases are critically important to understand.
The emphasis you put on retirement planning changes throughout the stages of your life. Early in your working life, during the Accumulation phase, retirement planning is about investing any available money towards your future retirement needs. During the middle of your working life you begin setting income and asset goals to plan for your retirement needs. Finally, in the later stage of your working life, you begin defining, with intentionality, your retirement goals and implementing the strategies available to achieve those goals.
For people in the accumulation phase, pre-retirement planning includes estimating your future expenses, identifying your future income sources, managing your investment strategies, and planning wisely for possible risks that could hinder your retirement desires. Retirement planning isn’t only financial though, it’s also about your personal desires for life as well. Some non-financial aspects include lifestyle choices such as when to fully stop working, how to spend your time in retirement, where you want to live, immediate and extended family goals, as well as many other important aspects. A holistic approach to retirement planning considers all of the important aspects of your life and their financial implications.
When you reach your retirement goal, you begin transitioning from the Accumulation phase to the Distribution phase of life. You’re no longer accumulating assets for retirement. Now, you’re receiving income, from the wealth you’ve accumulated over the last few decades. At this point it becomes clear that your years of planning will be truly tested and you hope your wealth and income will last as long as you do.
As mentioned before, there is another significant difference between the Accumulation and Distribution phases of life and that is a person’s investment mentality during the two phases. In the Accumulation phase, negative investment periods in the stock market are seen as disappointing or frustrating but not catastrophic. This is due to two factors; first, the investor is still employed and their income isn’t dependent upon their investment distributions. Second, investors recognize that when the stock market is down it represents a buying opportunity. Compare the Distribution phase with the Accumulation phase though and you find an important difference. In retirement, negative investment periods in the stock market are now seen as terrifying, overwhelming and possibly catastrophic. This is due to the opposite effects experienced by the previous two factors; first, the investor is now dependent upon the income distributions from their investment portfolio which has now been reduced due to negative stock market performance. Second, investors recognize that when their taking money from their investments and the stock market is down it doesn’t represent a buying opportunity, but rather it represents a fire sale. Understanding the differences between the Accumulation and Distribution phases is critical to achieving you and your family’s future financial desires.
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