By Phil Britt

Baby boomers are on the brink of a new "first" for their generation: retirement. In order to ensure that they are financially secure for the remainder of their years, there are several steps they need to take, according to financial planners. Unlike previous generations, most boomers don't have company-sponsored retirement plans on which to rely. In a 2004 study, the Congressional Budget Office (CBO) warned that, though Social Security benefits should be paid as scheduled, "budgetary pressures could result in lower benefit levels in the future for some recipients."

On the other hand, the CBO reported that boomers, on average, have more in terms of retirement savings than previous generations. Nonetheless, one-quarter of this generation will be financially stretched in retirement, according to the CBO.

As the numbers show, it is imperative that investors, whether they're planning or already in retirement, draw wisely on their savings/investments to maximize the benefits of those funds. These investments typically include taxable and non-taxable IRAs, 401(k) plans, as well as savings and investments held outside of retirement plans.

"A successful retirement requires a solid plan, just like the construction of a home requires the plans of an architect," says Darius G. Gagne, CFP, principal at Quantum Wealth Management, a firm that provides wealth management advice. "The plan must address IRA distribution choices, budgeting and an investment plan to ensure that the client doesn't outlive the money."

According to Vince Clanton, president of The Chancellor Group, a firm that specializes in comprehensive financial planning, "The first step is to audit where you are financially. You need to determine what your expenses are and create a budget, which should include non-recurring periodic payments like gifts, vacations, repairs, auto replacement and medical expenses."

While these expenses might be somewhat discretionary, they tend to occur regularly but often are ignored when people consider their retirement income needs, Clanton explains. "People think they have more discretionary income than they do. They should include the depreciation of a vehicle as part of a financial plan."

Show Me the Money

After determining their expenses and income from all sources, investors should consider consulting a financial professional to help devise "a suitably crafted, well-diversified portfolio," Clanton says.

"One big issue people encounter is, 'which bucket of investments do I draw from first,'" says Jim Weil, partner with the Financial Strategy Network LLC, a registered investment advisory firm. "We try to help clients draw on their funds in the most tax-efficient ways. Some clients want to spend their non-retirement investments first, but that's not a good idea."

By drawing on non-retirement investments, such as stocks, bonds and personal savings, and draining those before drawing on retirement resources such as a Roth IRA, the initial income tax will be higher, Weil explains. In some instances, drawing too much personal savings, such as selling stock for significant capital gains, can push a taxpayer into a higher tax bracket or may even make the investor subject to Alternative Minimum Tax rules, which also would increase the tax bite. By drawing on a mix of personal assets as well as taxable and non-taxable retirement savings, the investor can better manage the tax implications over several years.

Clanton adds that attempting to manage investment withdrawals strictly on the basis of today's tax implications also is dangerous because the tax laws change frequently. An investor should draw upon investments in such a way that he or she is selling into an up market rather than trying to over-manage future tax liabilities, which could change as a result of future tax law changes.

Stretching the Dollar

Managing tax liabilities is only one aspect of managing retirement finances. Certified financial planners agree that managing total withdrawals each year and managing the asset allocation mix of the portfolio are important elements of retirement financial management.

The percentage of savings from all sources that can be withdrawn each year depends on the age of the investor and the desire to leave an inheritance, Weil says. Someone who is 60 years of age can typically start withdrawing 4 percent to 5 percent of his principal per year without a concern that he will outlive his savings. By age 70, that amount increases to 6 percent.

"If you withdraw more, you're going to destroy your safety net," Weil says, referring to the risk of living several years longer than expected and needing to draw on investments for more years, unexpected expenses (i.e., assisted living care) or poor portfolio performance.

Clanton takes a slightly more conservative approach. By spending only 4 percent of savings, at least in the first couple of years of retirement, an investor has a 95 percent chance that his or her assets will last for at least 30 years.

However, those who find they've retired without enough in assets have some tough choices to make. The basic choices for them, according to Clanton, are to scale back their standard of living, sell their homes, buy something smaller and use the excess proceeds to cover the shortfall.

In the Mix

To guard against poor portfolio performance, certified financial planners recommend that investors have an asset allocation mix that balances the risks of different types of investments. The more risk tolerant an investor is, the heavier the percentage of stocks that Weil recommends. If the investor is less risk tolerant, Weil recommends a heavier mix of bonds.

Clanton says the more aggressive investor can still be safely diversified, even if he's as much as 100 percent invested in equities (including REITs), if those investments are spread across stocks of domestic, international and emerging markets. On the other hand, a conservative investor can get satisfactory diversification from a mix of 10 percent in treasury bills, 10 percent in REITs and 80 percent in bonds of varying maturity, according to Ibbotson Associates' fixed-income portfolio data.

Whereas Clanton sees REITs as part of a portfolio's equity mix, Weil recommends that 10 percent of assets be in REITs and 5 percent in commodities because these assets tend to move counter to stocks and bonds. Quantum Wrath's Gagne recommends 10 percent of a portfolio be invested in a mix of REITs and commodities.

Gagne also recommends that investors have a "liquidity portfolio" consisting of one-, two- and three-year certificates of deposit with a face value equal to one year of living expenses. This helps ensure that an investor always has three years worth of readily available cash available a year at a time.

As asset classes move in different directions, the actual allocations of a portfolio shift, certified financial planners point out. If stocks have a sharp run up or decline, it's likely that bonds have moved in another direction. A portfolio that was initially 60 percent bonds and 40 percent equities might now be reversed in the other direction. In that type of scenario, CFPs recommend that retirees rebalance the portfolio by selling equities and buying bonds to bring the asset allocation back to the desired mix. Doing this also helps to ensure that the retiree is indeed selling into an up market rather than panic selling because he needs the money.

"Review the plan annually at a minimum to make sure everything is on course," Clanton says.

"The sooner someone starts planning, the more options they have; the longer they wait, there are harder choices that they're going to face," Weil says.