Retired early and still coming up short

(Money Magazine) -- Question: I lost about 40% of my retirement savings after taking early retirement. I'm now 55 and have $650,000 left. Can you suggest a portfolio that provides capital appreciation, income and growth? I require about $6,000 a month to live on. --Bill, Philadelphia, Pennsylvania

Answer: Victorian poet Robert Browning once wrote, "Ah, but a man's reach should exceed his grasp. Or what's a heaven for?"

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Walter Updegrave is a senior editor with Money Magazine and is the author of "How to Retire Rich in a Totally Changed World: Why You're Not in Kansas Anymore" (Three Rivers Press 2005).

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I'm no literary scholar, but I take that line to mean that we should sometimes strive for more than we think we're capable of achieving. In short, that it can be a good thing to push ourselves a bit.

But there are limits. And if our reach exceeds our grasp by too much, we can end up doing more harm than good.

Which brings us to your situation.

I'm all for trying to get as much sustainable income out of a portfolio as you can. But you've also got to be realistic. And I just don't think it's realistic to expect to pull $6,000 a month for the rest of your life out of a $650,000 portfolio no matter how wisely you invest. If you try, I think you'll very likely run out of money before you run out of time.

Why? Well, $6,000 a month translates to an initial annual withdrawal rate of about 11% of your $650,000 nest egg ($72,000 ÷ $650,000).

As a general rule, if you want a reasonable level of assurance that your savings will last 30 years, you should probably limit yourself to an initial withdrawal of 4% to 5%, which in your case translates to $26,000 to $32,500, or $2,167 a month to $2,700 or so. That will leave you well short of the $6,000 you say you need, even, I suspect, after factoring in whatever Social Security benefits you're eligible for starting at age 62.

These withdrawal figures, by the way, assume that you boost the dollar amount of your initial withdrawal by the inflation rate each year in order to maintain your purchasing power in the face of rising prices.

Given that you're just 55 years old now and likely have a lot of living ahead of you, I'd say you pretty much have to make that adjustment. If you don't, and inflation moseys along even at a subdued yearly rate of 2%, you'll lose about a third of the purchasing power of your $6,000 a month by the time you're 75 and about 45% of your buying clout will have vanished by age 85.

Rules of thumb about the "safe" amount that you can withdraw from your nest egg without depleting it in your lifetime are only guidelines. It's possible that if the financial markets perform well, you might be able to withdraw more without your assets running dry. Question is whether it makes sense to count on it. I see this is an instance where you want to be careful about your reach exceeding your grasp.

All of which is to say that it seems to me what you face here isn't an investing question so much as a "How do I arrange my finances to assure I'll have enough income for the rest of my life?" question.

One option is for you to settle on a lifestyle that requires less than $6,000 a month -- i.e., to cut your expenses. But I'd say your chances of downsizing from $6,000 a month to less than $3,000 are slim unless there's a heck of a lot of fat in your budget or you're okay with radical lifestyle changes.

A better move -- by which I mean more likely to improve your retirement prospects -- might be to go back to work. You're only 55, after all. Unless you have major health problems, you've still got quite a few productive years left.

If you return to work full-time, you would not only give your battered portfolio time to rebuild without the drag of withdrawals, you could also throw in some new savings. Even working just part-time would allow you to pull less from your savings, giving it a better chance to revive.

Granted, finding a job in today's economic environment will be a challenge. But the odds should begin to tilt more in your favor as the economy revives. In any case, I don't see that you have much to lose by starting now and visiting job sites geared toward older workers like RetirementJobs.com and RetiredBrains. While you're at it, you should also check out this recent Money story, aptly titled "The Right Way To Unretire".

As for investing your $650,000, again we come back to the issue of how hard you want to push. Invest too conservatively and you may not get the income you need. Go at it too aggressively and you may get whacked so hard during a market setback that your portfolio can't recover, increasing your odds of running out of money while you're still living.

You can try out various mixes of stocks and bonds to see how much sustainable income each might generate by going to T. Rowe Price's Retirement Income Calculator. If you wish, the tool will recommend a portfolio for you. This calculator also allows you to factor in income from a job. So in addition to seeing the effect of different investing strategies, you'll be able to see how working a few years (or longer) can improve your retirement prospects.

The takeaway here, though, is that I don't think you're going to be able to get the income you need just by investing smarter. And if you try, you could end up facing an even more severe income shortage down the road, when you'll have even fewer options for dealing with it.