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Make your money last in retirement
You've got an IRA and Social Security to count on. Will it be enough?
By Walter Updegrave, MONEY Magazine senior editor

NEW YORK (MONEY) -- QUESTION: I'm about six months shy of 62 and expect to be laid off soon. I'll have enough savings to hold me over until I begin collecting Social Security, and after that I'll have Social Security plus about $320,000 in an IRA rollover. Of course, I'll also have to pay for medical insurance until I hit 65, when I can enroll in Medicare.

My question: how should I invest my IRA rollover so that I can pay medical insurance and other living costs? I'm single with no dependents and I have no other income. I will also have a low risk tolerance for investing after I stop working. What do you suggest?

- Sheri, Nanuet, New York

The first thing I suggest is that you consider some options other than simply retiring and taking Social Security. You didn't provide enough information to give me a good overall sense of your financial situation. You don't say, for example, what your current salary is or how much income you think you'll need to get by once you retire.

But based on what you have told me, it seems likely to me that the amount of income you can reasonably expect to draw after leaving your job might fall short of what you'll need.

Let's start with that $320,000 in the IRA rollover. Although that's a nice size nest egg, you can't draw as much money from it as you might think.

If you retire at 62, there's a good chance you'll spend 30 or more years in retirement. At least that's the minimum you should be planning on because if you spend down your nest egg as if you'll only live to 85 and you end up making it to 90, those last five years could be pretty grim.

As a rule, if you want your nest egg to last at least 30 years, you should limit your draw in your first year of retirement to about 4% of your portfolio's value, or about $13,000 in your case.

That might seem overly conservative, but remember: unless new Federal Reserve chairman "Big Ben" Bernanke figures out a way to do away with inflation, prices for the things you'll need will continue to rise during your retirement, which means so must the amount you withdraw from your portfolio. So you'll want to increase the dollar amount you withdraw by the inflation rate each year.

What this means is that the dollar amount you'll draw from your portfolio will grow over time, which is why you need to start with an initial draw of 4% or so if you want your portfolio to last 30 or more years. (There are some advisers who maintain your spending declines as you age and thus you can draw more early in retirement. But as I've noted in a previous column, but I advise caution on that front.)

Counting on Social Security

In addition to the $13,000 from your portfolio, you'll also have Social Security coming in. Since I don't know your current salary (let alone your salary history, which is instrumental in figuring your benefit), let's generously estimate that your Social Security payment comes in around $15,000 a year, which would be a decent estimate for someone earning $70,000 today. (You can get a more accurate estimate of your Social Security benefit by going to the Social Security benefit calculator.

So with both your Social Security and draws from your portfolio, you're probably talking pre-tax annual income of less than $30,000 a year.

You'll have to decide whether that's enough. Keep in mind too that for the three years until you're eligible for Medicare, you'll also have to pay for medical insurance, which I'm sure I don't have to tell you can be quite a hefty expense on its own. (And Medicare doesn't cover everything either.)

Granted, that $30,000 a year should rise with inflation since Social Security payments are designed to rise with the cost of living and you'll withdraw a little more from the IRA each year.

But, for many people, $30,000 may not leave a lot of wiggle room.

Of course, if your investments do very well, you may be able to increase your withdrawals without running the risk of going through your nest egg too soon. But I don't think you want to be basing your retirement security on the possibility of outsize investment performance.

Some other options

So what do I recommend? Well, for one thing you might consider looking for another job. You may not be able to find one that pays as much as your current gig, but even if you can find something that pays enough for you to live on then at least you won't be dipping into that IRA money so soon, which means it can continue to grow and you'll be able to increase the size of your draws later.

If the job pays medical insurance, so much the better because that's an expense you won't have to meet on your own.

And if you can postpone taking Social Security a couple of years, you'll get a bigger payment when you eventually start. (The calculator I mentioned earlier can tell you how much larger a payment you'll get by waiting.)

If starting a new job isn't practical for some reason, then I think you should at least try finding some part-time work. Alas, your Social Security benefit may be reduced if you work while drawing Social Security benefits before your full retirement age.

Investing the IRA

As for how you should invest the $320,000 in your IRA rollover, you want to do it in a way that doesn't subject your nest egg to undue risk. After all, if you suffer a huge loss, you can't go out and build yourself a new nest egg at this point.

But at the same time, you need to invest aggressively enough so that your nest egg continues to grow and allows your withdrawals to keep up with inflation.

For want of a better name, I'd call this a "conservative growth" strategy. Generally, that means holding a diversified mix of stocks and bonds. The exact proportion can vary depending on individual taste and how much risk you think you can take.

But if you want a decent assurance of your rollover money lasting at least 30 years, we're probably talking putting somewhere between 40% to 60% in stocks. (See more on the advantages to holding stocks in retirement.)

An easy way to create such a mix is by building a portfolio of mutual funds such as those in the MONEY 65, MONEY Magazine's elite list of recommended funds.

Easier still, you can get a "pre-mixed" mix that also changes as you age by investing in a target-retirement fund. (See more on how these funds work. The MONEY 65 also includes target-retirement funds.)

But as important as your investment strategy is, I think it's even more important that you sit down, go over your expenses and potential income and decide whether you can really afford to retire.

If it turns out you can, great, have a ball. But if working full- or part-time a bit longer gives you more of a comfort margin, then maybe you're better off hanging in for a few more years, and having even more fun later.


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