One of the first tasks in facing retirement is to examine current living expenses and decide if they will remain the same or not. Some expenses are fixed, while others will vary.
Most retirees have no desire to downsize their homes or lifestyles. Whether this is an option, it will be spelled out with a comprehensive analysis. In addition to current monthly expenses, there may be new expenses for entertainment, hobbies, and travel to cover the available time.
Lifestyle and cash flow are a function of a percentage of withdrawal from assets. Basic advice is to approach this with two goals. The first level is the way it would look if physicians had their wish. The second level is the way it would look if they had to deal with what was tolerable.
A completed retirement analysis will provide desired needs. Most times, what is prudent and acceptable will fall somewhere in between in order to achieve a suitable degree of probability of success.
There are always priorities to make things work: cash flow, remaining estate, amount of portfolio risk, retirement age. All have an effect on an acceptable probability of success for never running out of money that is based on investable assets and income sources.
The next step is to look at the retirement and non-retirement accounts and see how much volatility there is and if it is not too much (or too little) to achieve your goals.
When the data is compiled, computed, and analyzed, the level of standard deviation (risk) recommended will be dictated within a narrow range. This will represent the maximum amount of risk needed to meet goals given one’s exact circumstances.
Taking addition risk would be counterproductive, as the “consequence” of loss may prove devastating and would far exceed the “consequence” or benefit of the gain.
The next step is to create an efficient portfolio that produces an expected rate of return that commensurates with the dictated rate of risk. One should combine assets classes that:
1) Are not correlated and, therefore, would not all go up or down at the same time;
2) Have the asset classes under- or over-weighted according to the expectations of future market moves.
This is not a static process but a dynamic one that recommends rebalancing of asset classes and monitors the returns of managers compared to their performance against their peers and appropriate indices.