The number of retirees is set to double over the next 30 years according to the U.S. Census Bureau. In 2008, the leading edge of the baby boom generation those born between 1946 and 1964 will turn 62. By the year 2050, over one million Americans are projected to be 100 years of age or older. For the 78 million Americans who make up this generation, retirement may represent the longest stage of their life.

Along with a much longer life, however, comes more complex and more expensive financial challenges. Proper planning and preparation is critical for meeting the challenges and uncertainties that lie ahead as you approach retirement and during your retirement years to protect against the potential risk of outliving your money.

When people retire, they want their retirement funds to last for the rest of their life. How much you need to finance your retirement depends on how well you want to live and the expected length of your retirement life. Do you want to maintain or increase your standard of living? Do you want to start a new business, provide financial help to family members or engage in a new hobby or activity? How much you need to accumulate depends on the lifestyle you envision.

The shift away from defined benefit plans to defined contribution plans is a trend that has revolutionized retirement planning by placing more of the responsibility for saving on the individual. Since fewer retirees in the future can expect to receive a steady stream of income from employer provided defined benefit plans, individuals will have to rely more on their own resources for a much higher percentage of their retirement income. Now more than ever, people are faced with having to make serious decisions about how to manage their company retirement plan, how much to contribute, how to invest their money and what to do with their vested balance after they retire. They need to have a plan based on clear and accurate information to help them make decisions about when to retire, how long they can expect to live in retirement, how much they need to accumulate and how to manage their funds throughout their retirement years.

Many people depend on a fixed income stream during retirement. However, in an inflationary environment, a fixed income stream will not allow one to maintain a constant standard of living. A more appropriate means of providing an income stream throughout the retirement years is to have your income increase annually with inflation. For example, to receive the equivalent of $150,000 in todays dollars at the beginning of each year increasing at the rate of 3% for thirty-five years, you would need an estimated target portfolio of over $2,620,000 earning an average annual after-tax return of 8%.

Decisions about when to retire, how long you can expect to live in retirement and how much you need to accumulate are complicated by an ever changing set of circumstances. Uncertain knowledge of investment returns, length of life in retirement, and rising expenditures make assumptions about the future less reliable. An extended market decline soon after retirement could jeopardize the sustainability of withdrawals over the life of the retirement period. This is a significant risk in retirement, which can have a tremendous impact on retirement security.

When planning for retirement, the challenge is to assure that you never outlive your money. How you configure your retirement accumulations using the most appropriate asset allocation strategy is one of the most important factors that determines both the risk and return of your portfolio. During the distribution phase, the sustainability of your investment portfolio depends largely on the stability of the withdrawal rate. This is the rate of portfolio liquidation, expressed as a percentage. Meeting financial obligations through an investment-based approach is only one part of the process. If the withdrawal rate increases over the years, more of the portfolio will be liquidated each year increasing the possibility that the portfolio will be depleted much sooner the expected. Combining a diversified allocation strategy with a guaranteed income stream increases the likelihood that the retirement funds will provide an income for life.

If you are committed to the proper management of your retirement funds today, you will be in the best possible position to achieve your goal of financial independence and freedom for tomorrow.

Copyright 2006 William E. Griffith, Jr. CFP