Living in retirement: Make it last
How to make the most out of your savings -- without running through it all.
October 1, 2002: 11:17 AM EDT
By Penelope Wang, Laura Lallos & Walecia Konrad, Money Magazine

As a retiree, you have one overriding concern: making sure your money lasts as long as you do. In an era of reduced return expectations and rock-bottom interest rates, you face the daunting task of figuring out how to use your portfolio without using it up.

We've got a plan.

Start by figuring out how much income you need as opposed to how much you'd like. Neil Hokanson, head of Hokanson Capital Management in Solana Beach, Calif., divides clients' expenses into three tiers. "The first is basic living -- food, taxes, clothing, shelter, insurance -- and it tends to be a pretty small number," he says. "The second is travel and leisure, the fun stuff, and the third is charitable giving and gifting to heirs. Make sure tier one is bulletproof."

For some people, pension and Social Security checks cover basic expenses. Other people will have so much saved for retirement that they can sock much of their money into relatively safe fixed-income investments and live off the monthly interest.

But to pull in $50,000 a year from a diversified bond portfolio today, when the 10-year Treasury is yielding less than 5 percent, you'd need more than $1 million.

"Retired investors have to consider a mind-set change," says Jack Brod, who heads up Vanguard's Wealth Advisory Services. "There is a big misconception that one can set up an income-producing portfolio that will meet one's needs without requiring dips into principal. But our mainstream clients would have to sacrifice their standard of living to avoid using principal."

Most people will need to draw on a combination of sources that includes Social Security plus any pensions, interest and dividends -- and modest withdrawals from an investment portfolio.

Keep your balance

Now comes the tricky part -- how do you divide your portfolio among stocks, bonds and cash, and how much can you afford to withdraw each year?

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The key issues: How long do you expect to live? Will your portfolio need to last the lifetime of a younger spouse? Do you want to leave an inheritance for children or a bequest to charity? What kind of returns do you expect your portfolio to earn?

Despite all the variables, your answers will probably fall within a fairly narrow range. Most planners recommend withdrawing no more than 6 percent of your portfolio each year. Diane Maloney of Beacon Financial Planning Services in Plainfield, Ill. says that's the highest cutoff she'd advise.

That's because you can't count on a diversified portfolio averaging more than 7 or 8 percent a year, and you have to leave some leeway to make up for any down years you might encounter.

Vanguard's Brod notes that a conservative investor, one who doesn't want to invest too much in stocks or risk running out of money, might be more comfortable withdrawing as little as 2 percent each year. A typical initial withdrawal rate for T. Rowe Price clients is 4 percent, says Todd Cleary, director of Advisory Services. (Cleary recommends increasing the withdrawal amount to keep pace with inflation each year.)

If you can't rely on income, then you need stocks to keep your portfolio growing even as you pull money out. But retired investors can't afford to absorb big losses; bonds can help cushion the downside. Putting 40 to 60 percent of your money in stocks is usually a good bet for growth with moderate volatility.

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Of course, no matter how careful a strategy you devise, be prepared to alter it as circumstances change. Sometimes the only course is to tighten your belt a notch: Skimming 4 percent off a portfolio that lost 4 percent in 2001 -- as did the typical balanced mutual fund -- could leave you short on spending money this year. But if you take out more, you'll have even less money at work when the next rally rolls around, and if your portfolio doesn't grow enough, it may not survive.

You can also tweak your portfolio as times demand. With interest rates down, you can consider putting 10 to 20 percent of your fixed-income portfolio into high-yield bonds. Their yield advantage over high-quality bonds is historically high, and many market watchers are expecting them to surge when the economy rebounds. And some advisers recommend a small stake in real estate investment trusts, or REITs, which offer high yields, for clients who can stand the volatility of these securities (see more on REITs -- click here.)

Take taxes into account

There's one more variable to consider: taxes. Conventional wisdom says to start with tax-free withdrawals from your Roth IRA, then pull from taxable accounts. But if you plan to leave a legacy, you may want to leave the Roth untouched. You never have to make withdrawals from a Roth, so it's a good way to let money for your heirs grow tax-free.

A commonsense strategy to postpone taxes is to put off taking money from your IRA or 401(k) until you have to at age 701/2. Good news for those who must: The IRS has simplified the process for figuring required minimum distributions. Better yet, you may be able to take out less than you have been; see Publication No. 590 at for details.

Remember, you don't have to spend required distributions. Set aside what you don't need and reinvest it in a taxable account. You'll boost your odds of making your portfolio last a lifetime.  Top of page

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