Making Your Money Last in Retirement

July 01, 2016

Many of us may live well into our 90s, especially if one or more of our parents did so. Most of my clients have at least a 20% chance of living to 90, with a 10% chance of living to 100!

With a retirement that may last from 20 to 30 plus years, deciding how much you can safely withdraw from your savings and investments is essential to your peace of mind. Some of the most complicated work I do for my clients centers around what’s called “distribution or withdrawal strategies.”

First proposed in the mid-1980s, a conservative guideline has been to withdraw 4% to 5% of your principal each year. But that amount could actually be more or less, depending on the amount in your retirement account, whether or not you have a pension, the estimated length of retirement, market conditions, inflation, whether it’s taxed or not, and your financial goals (whether you plan to spend down all your assets or want to pass along some of your wealth to family or charities).

Some researchers are proposing that in today’s low interest rate environment, 3% is safer. Others suggest that this could be too conservative and for some portfolios, clients can withdraw much more. This can be both an art and a science and requires many conversations with clients to develop the approach that works best for their needs.

Developing a diverse income strategy that maximizes return—and is calibrated to your risk level—is important.

Stocks, with their ability to generate both dividends and appreciate in value, provide the longer term growth to last your lifetime. Keeping a year’s worth of cash in CDs or a high interest bank account for living expenses provides some security. Income strategies may also include CDs, bond funds, dividend paying stocks and real estate investment trust funds (REITs) and perhaps adding an annuity to provide guaranteed income. Some annuities can be complex and expensive, with numerous pros and cons. I typically recommend the annuities at Vanguard for their low cost and straightforward approach to generating guaranteed income streams.

Financial Planning Association