Create a "Retirement Paycheck" – Don’t Run Out of Money

Plan to make your money last your lifetime. Nobody wants to run out of money, nor do they want to live like hermits. Retirement plans should take into account how you access your savings to do the things you want to do.

• A number of recent research studies recommend somewhere between 4 percent to 5 percent of assets (annually adjusted for inflation) as a “safe” annual withdrawal rate to avoid outliving your savings (for example, $20,000 to $25,000 from a $500,000 portfolio). They usually assume that 50 percent to 75 percent of the portfolio is in stock, which is too aggressive for many retirees. More conservative investors may need to withdraw less (for example, 3 percent or 3.5 percent).
• Withdrawal plans should consider the fact that many retirees spend less in their 70s and 80s than their 60s. Preretirees do not have to do these calculations themselves. With 76 million baby boomers nearing retirement, the financial services industry is gearing up to provide assistance with retirement asset withdrawals. Some major mutual fund companies already offer this service.
• Asset withdrawals should be done in a tax-efficient manner. This generally means withdrawing money from taxable or tax-free investments first, and leaving tax-deferred assets (for example, IRAs and 401(k)s) to grow as long as possible, preferably until age 70 1/2 when mandatory minimum withdrawals must begin.
• Consider annuitizing a portion of your retirement assets to provide the assurance of a continued stream of income for life. Recent research indicates that this strategy increases the success rate of not running out of money. An annuity is a contract with a life insurance company to provide a stream of monthly income in exchange for a sum of money deposited with the company. Payments can be made for the life of a single individual, the joint lives of a married couple, or for a period of time or payments specified in the annuity contract. Look for an annuity that has low expenses, such as management fees and surrender charges. The less an investor pays in expenses, the more money they keep in their pocket.
• Pay yourself on a regular basis. Many financial experts advise retirees to keep three to five years worth of cash withdrawals in liquid assets such as a money market fund. This way they don’t have to sell stocks during a bear (declining) market or bonds when interest rates are rising and bond prices are falling.
• Once someone decides upon their withdrawal rate (for example, 4 percent), the mechanics of creating a “retirement paycheck” are very simple. First, multiply the total investment balance by the withdrawal rate to get the annual withdrawal amount ($500,000 x .04 = $20,000). Then divide the annual withdrawal amount by 12, 26, or 52 to receive income monthly, biweekly, or weekly ($20,000 = $1,666 monthly, $769 biweekly, and $385 weekly).
• Replenish the cash reserve frequently, preferably when market conditions are favorable to making cash withdrawals from investments without loss of principal.