Investing on auto pilot has its limits

The idea of investing and then letting nature (and the market) take its course may tempt you. Beware forgetting your controls for too long, though.

My first airplane ride was in 1988. I remember the anxiety and the thrill. The plane ride was seamless: same plane, pilot and crew, and just a new location after landing.

The crew experienced the flight differently, of course, and in three distinct stages. They helped us board the plane and place our luggage before takeoff, served us a snack at 30,000 feet, and then reminded us to buckle up for landing.

Similarly, you as an investor may perceive a similar seamlessness when doing retirement planning. Just as location was the only change I truly noticed on my plane ride, all you might note as an investor is a changed account balance when your statement arrives. You might easily tend to get caught on autopilot without noting the three investment stages you need to manage moving toward retirement.

Accumulation: Your primary goal in this stage is saving the correct percentage of income and building diversification to benefit your tax situation.

Your nest egg ought to include more than your 401(k) plan. Your goal is a mix of tax-deferred (such as traditional individual retirement accounts), tax-free (Roth IRAs) and taxable accounts. Investment returns are nice; retirement success comes from tax diversification.

Preservation: Here, the amount that you invest becomes secondary to preserving the nest egg.

Distribution: This phase requires relentless attention to volatility and awareness of the tax treatment on every ­dollar needed.

If an adviser mentions "average investment return" during the distribution period, end the conversation — the adviser clearly does not understand math. Taxation and volatility are paramount in landing the investment plan safely.

Markets don't move in straight lines. When you take distributions, the funds are gone. "Average return" doesn't take that into consideration; your experience might be much better or worse than average.

Landing a plane is an art that stems from learning and experience. Ditto planning for distributions in your retirement.