How to make your retirement savings last

I have about $700,000 and plan on retiring soon at age 62. How can I make this money last at least 30 years? -- Steve, Vevay, Ind.

Making sure your money lasts isn't your only goal for retirement. Presumably, you also want to be able to draw enough from your savings to live relatively comfortably the rest of your life. And I assume you would like to have some flexibility about how you tap this nest egg, so you can fund not just regular living costs but unexpected expenses and the occasional splurge.

I mention this not to quibble, but because understanding that you actually have several goals is important when deciding how to manage your $700,000 stash.

If making sure you didn't outlive your nest egg were your only consideration, you could simply put your entire 700 grand into an immediate annuity, a type of investment that gives you a monthly check the rest of your life. As long as you're prudent about how you go about it -- sticking to highly-rated insurers, spreading your money among enough companies to assure you're fully covered by your state's insurance guaranty association -- you could sit back and collect $3,600 a month, possibly more, for as long as you live.

But you would also give up something -- namely, access to your money. Once you buy the annuity, you can no longer dip into your stash for emergencies and such. You receive only the monthly payments. And unless you buy an immediate annuity with an inflation rider -- which usually means accepting an initial payment that's about 25% less than one without inflation protection -- the purchasing power of your monthly check will decline throughout retirement.

Such shortcomings are why putting your entire stash in an immediate annuity probably isn't the right way to go.

Related: Why there's no such thing as risk-free investing

There's another option, however, that can give you the flexibility you need, plus a good shot at inflation protection. Just invest your 700 grand in a relatively conservative mix of stock and bond funds -- say, 50% stocks-50% bonds -- and withdraw the cash you need each year.

To increase the odds that your money will last at least 30 years, you could follow what's commonly referred to as the "4% rule" -- that is, withdraw 4% of your nest egg's value the first year of retirement, $28,000 in your case, and increase that amount by the inflation rate each year to maintain your purchasing power.

Get a better return on your savings
Get a better return on your savings

Although the probability can vary depending on the assumptions you make about inflation and investment returns, there's roughly an 80% chance your money will last at least 30 years if you follow this regimen. Plus, you would have the opportunity to dip into your stash for extra cash should you need it.

But this approach has drawbacks, too. One is that while your chances of running out of money too soon are low, they're not zero. There is still a meaningful risk. That's especially true if your investments take a big hit early in retirement. In that case, the combination of investment losses, plus withdrawals could so deplete your portfolio's value that your nest egg could run dry well before 30 years.

Related: The ground rules for retirement investing

Even if you avoid the 20% or so of circumstances where your dough runs out, there's another risk: If the markets do well and your stock and bond funds prosper, you could end up with a still sizable nest egg after 30 years, possibly even larger than the $700,000 you started with.

That may not seem like a problem. But if you're sitting on a big pile of dough in your dotage, it means you could have spent more earlier on in retirement and presumably enjoyed yourself more.

So how can you manage your $700,000 so that you have a better shot at achieving these multiple goals -- making sure you don't run out of money too soon, maintaining the flexibility to spend more if necessary and avoiding living too frugally early on?

Start by dividing your retirement outlays into two groups: essential expenses, or the costs you absolutely have to meet (mortgage or rent, utilities, taxes, food, etc.) and discretionary expenses, or those you could defer or cut dramatically (entertainment, travel, etc.).

Then see whether you can cover all or nearly all the necessities from guaranteed sources of income, such as Social Security and any pensions. If you can, then you may simply want to invest your $700,000 in a portfolio of stock and bond funds and some cash equivalents.

Since this stash will be funding spending that you could eliminate or cut back on in a pinch, you don't have to earn a very high rate of return on it. So you can invest very conservatively if you wish, keeping say, 20% to 30% in stocks and the rest in bonds and cash. Such a mix will give you decent protection from market downturns, yet provide enough growth to fund your discretionary spending and provide a cushion for emergencies. You could even dip into it down the road if you need to lay out more money for necessities due to inflation.

Related: The case for investing in bonds

If your required expenses exceed your income from Social Security and pensions -- which will probably be the case for most people -- then you may want to invest a portion of your $700,000 in an immediate annuity.

The idea is to invest enough so the combination of annuity payments and Social Security will cover the bulk of your essential expenses. You can then invest the remaining amount in stocks, bonds and cash, using that money to pay for discretionary expenses and as a hedge against future inflation. (Read more about how this annuity-plus-investments strategy might work.)

One final note: Even though you're eligible to start collecting Social Security at age 62, you may want to consider holding off until you're older to qualify for a payment that would increase by about 8% each year you defer. Doing that would require you to draw more from your savings until the higher Social Security payment kicks in. But as long as you live into your 80s, you would still likely come out ahead by waiting for the bigger check.

Ultimately, of course, none of us knows precisely how long we'll live or exactly what expenses we'll meet in our post-career life. That makes it all the more important to develop a strategy that will generate at least a minimum level of acceptable lifetime income, while also allowing you to boost your spending if you wish or must.

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