Think Differently

When you’re working, you have one objective: grow your savings as much as possible. We call this time the accumulation phase. You’re feeding and watering your savings, checking in occasionally to see how your investments are doing, and changing direction as necessary.

As you enter retirement, your nest egg changes. You’re now in the distribution phase, which can be harder to manage and may last for many years.

Break down your retirement savings into three different parts:

• Income. You’ll need to withdraw money for living expenses. Your retirement savings will supplement any money you receive from Social Security, retirement plans from other employers, or income you receive from a part-time job.

• Liquidity. With liquidity, you are able to access some of your money quickly and easily so you can make withdrawals for planned and unplanned expenses.

• Growth. As you deplete your savings, you’ll want to keep it growing. Consider keeping part of your money invested in stocks or stock mutual funds so your investment earnings can help replenish your withdrawals.

Withdrawing Your Money

Once you reach the distribution phase, figuring out your withdrawal rate — the amount of money you will take out of your retirement savings each year — is one of the biggest decisions to make. Take too much and you run the risk of your money not lasting throughout your retirement.

How much to draw down is not an easy decision. About four out of five retirement-age Americans fail the test on making a nest egg last (Source: RICP® Retirement Income Literacy Survey, from The American College of Financial Services).

So how much should you take? Many financial experts suggest you withdraw around 4% to 5% each year.

The example below shows the likelihood of an investment portfolio lasting 30 years in retirement (assuming a mix of 50% stocks and 50% bonds) at various withdrawal rates. For example, your 50% stocks/50% bonds portfolio has a 90% chance of lasting 30 years with a 4% withdrawal rate, 60% chance with a 6% withdrawal rate, 20% chance with an 8% withdrawal rate, and 2% chance with a 10% withdrawal rate.

Whatever you decide, be ready to evolve. The strategy you start with won’t be the one you end with years from now.

Investment Mix

Your withdrawal rate is important. But that’s not the only factor to consider. Your asset allocation — how you spread your investments across different asset classes such as stocks and bonds — also determines how long your savings will last.

Investing too conservatively (mostly in lower-return investments such as bonds) means your money won’t last as long. Investing too aggressively (mostly in higher-return investments such as stocks) runs the risk that the market will dip and your investments won’t have enough time to recover. Many financial experts suggest you have a diversified mix of some stocks and some bonds.

This example shows the likelihood of your nest egg lasting over 30 years at a 5% withdrawal rate with different mixtures of stocks and bonds. For example, a 100% bonds portfolio has a 34% chance of lasting 30 years in retirement. A portfolio of 25% stocks and 75% bonds has a 66% chance of lasting 30 years in retirement. A portfolio of 50% stocks and 50% bonds has a 78% chance of lasting 30 years in retirement.

As you can see, your money is more likely to last throughout your retirement if you have a balanced mix of stocks and bonds.

Change Your Strategy

Let’s say you’ve run the numbers and your nest egg is a little light. Consider these tips to help your stretch your money further.

• Consider a variable withdrawal rate. A variable withdrawal rate means you take more money out in the good years and less in the leaner years (when your investments don’t earn as much).

• Adjust your asset allocation. You can lean more heavily on stocks but proceed with caution. Stocks typically have higher returns but they also have higher risks and greater fluctuation.

• Shop around for some guarantees. You could annuitize part of your account, where you buy an annuity and you receive regular payments. Annuities come with their own risks, so do your research.

• Pursue part-time income. You may need to supplement your savings with income. Do you have a hobby or skill you can turn into a job?