A Perfect Retirement in 10 Easy Steps

Pay attention to upcoming capital gains and income distributions before you invest in a mutual fund, especially late in the calendar year. If your timing is wrong, you could wind up being taxed on part of the money you invest as if it were a profit. This is not fair, but it’s the way things work.

Choose tax-efficient mutual funds. A study by Lipper found that U.S. mutual fund investors paid approximately $8.6 billion in taxes in 2002. The study found that over the previous 10 years, taxes paid by mutual fund shareholders on average amounted to almost 1.8 percentage points of return on equity funds and almost 1.5 percentage points of return on fixed-income funds. Portfolio turnover is one good indicator of tax efficiency. When other things are equal, the fund that has lower portfolio turnover will leave more money in your pocket. You can also compare funds’ tax-adjusted returns, which are reported by Morningstar Inc.

Don’t double up on tax shelters. It makes no sense to buy a variable annuity inside an IRA. Don’t take advice from any planner or broker who tries to put tax-deferred assets into your IRA.

Keep records of your mutual fund purchases and reinvestments of dividends and capital gains. If you are sloppy, you can wind up eventually paying taxes twice on the same income.

Step 9: Put the management of your portfolio on automatic. This is the best way to keep your emotions from subverting your intentions and your plans.

Economists who study human behavior say people make financial decisions based on their emotions. Yet the outcomes of those decisions are not determined by emotions. The outcomes are determined by hard, cold reality. I believe this difference is one of the biggest challenges facing investors.

If you’re still accumulating money, sign up for automatic investment plans whenever you can. That way, you’ll know the money goes to work for you when it should. Dollar-cost-averaging will make sure you automatically buy more shares when prices are lower and fewer shares when prices are higher.

Index funds will make sure you automatically diversify and adjust your portfolio for the comings and goings of various companies.

If you are using a timing system, hire somebody to do it for you. That way you know for sure that the timing system you have chosen will be followed.

Putting your portfolio on automatic is also the way to give yourself the highest probability of success and to defend yourself against sales pitches from brokers who want you to do something different.

Step 10: Determine the best strategy for withdrawing your money. This can be tricky, and you may benefit from sitting down with a professional to make sure you understand the decisions you must make and their ramifications.

One of the most important decisions you face is whether to take out a fixed amount from your investments every year or whether to let your withdrawal vary from year to year depending on the performance of your investments.

This is essentially a choice of what type of risk you want to take. If you take a fixed amount from your portfolio, you will know what you can count on and plan your life accordingly. But you take the risk that you could run out of money because your withdrawals won’t have anything to do with your investment performance.

If on the other hand you take a variable amount, say 5 percent or 6 percent of the portfolio value each year, you can be pretty sure you won’t ever run out of money, and you’ll most likely have some left over to leave in your will. Consequently, you’ll know that the amount you withdraw is an amount you can afford. On the other hand, with this plan you won’t know what you can count on for living expenses in the future.

You also must figure out a way to make withdrawals that will keep your portfolio properly balanced in the assets that in turn will keep you within your risk tolerance.

It’s very important that you take this final step with plenty of thought, so you can learn from the mistakes and successes of those who have gone before you. For a more thorough discussion of this topic, see an article on our Web site called “Retirement: When Your Portfolio Starts Paying You.”

This completes the list of 10 steps I cover in my workshops. They will steer you in the right directions and steer you away from the biggest sources of financial trouble.

But no description of the “perfect retirement” would be complete if it focused only on financial factors. Here are a few other things you can – and should – do in order to make sure you get the most benefit from this important part of your life.

Make sure you have plenty to live for. A good exercise is to write a list of at least 100 things you want to do: places to go, people to see, books to read, golf courses to master. Make sure you know what will get you motivated each morning. Then give yourself ways to pursue those things.

Take care of your health by seeing your doctor regularly and taking his or her advice. Don’t neglect your mental health, either. It’s a major determinant of how satisfied you’ll be in retirement.

Keep yourself mentally active and challenged. You’ll live longer – and you’ll want to live longer. Read. Write. Take a course. Teach a course. Travel. And when you travel, don’t always go on group tours where everything has been arranged ahead of time. Choose stimulating destinations and travel in ways that will require you to figure things out.

Cultivate new relationships. Don’t make the mistake of crawling into a shell. Meet people who share your interests, including people who are younger than you. The happiest retired people I know have lots of favorite people in their lives.

As I wrote in an article for Alaska Airlines Magazine a few years ago: At the end, life can sweep away our dignity and our money. But if we have friends with whom we can share joy, pain and respect, we are blessed.

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