Before cutting your retirement cake and purchasing that new set of golf clubs, please make sure that you have made provisions to Protect the wealth you have Accumulated during your working years. The biggest mistake that I see people making is that they go directly from the accumulation phase into distribution. They continue to invest as if they are preparing for retirement a long ways out, when they are actually already retired or about to retire. The problem with this is that when the market has big corrections, as it always does, and you’re taking distributions – you’re essentially forced to sell your investments for income when the market’s down. You can never make that money back and you could deplete your savings much faster as a result. This is how you run the risk of running out of money later in life.
The accumulation phase starts early in life. When we are accumulating assets, we are typically willing to take more risk with this money because we have a long time horizon. Let’s face it, we’re working, we are going to be working for a long time, if we have losses, there is time to make it back. Or, if the market crashes, we can wait for it to come back because we have a long time horizon before we enter the second phase—the preservation phase.
In the preservation phase, we start to preserve some of the assets that we’ve accumulated throughout our lifetime as we get closer to our retirement goals. In this phase, there’s less time to make mistakes with your money or to experience major volatility because you’re going to need this money sooner rather than later. Taking this step prepares us for the third and final
The distribution phase is for both distributions to ourselves in retirement and to our family upon our passing. This is when you begin to draw from what you’ve accumulated and preserved and start taking an income from your savings and investments.
What’s the solution? We need to preserve a portion of the assets as we approach retirement. The way to do this is to take a bucket planning approach to your distribution of income. Look at distribution in terms of money you will need in the now, soon and later time frames.