11 smart moves to help your money last in retirement
Financial advisers will tell you that the most telling --
and risky -- years of your retirement are the five
before you leave the 9-to-5 world, and the five after
you have forsaken a steady paycheck and learn to
live on Social Security, perhaps a pension, and a
lifetime of wealth accumulation through a retirement
plan. Indeed, making your money last as long as you
and your spouse do consistently shows up as the
biggest worry among folks approaching or in
To help you with these vexing questions, we asked
credentialed financial advisers and attorneys to share
with you the advice they give to their clients. Here are
eleven insights from the pros.
The biggest secret lies long before retirement
Falling into the consumption trap can kill anyone's
chances to make it through retirement. It's tough
enough to save what's needed for retirement. Poor
spending habits are a key factor. Those trying to save
enough to retire would be wise to remember that their
future selves will appreciate their restraint in their
younger years. It's a simple concept, but often hard to
Have a realistic expectation of how long you'll live
How long do you need to plan for your retirement? A
lifetime, of course. But how long is that? You could try
the calculator from the Social Security website, but it
will only give you an "average" life expectancy, and
the problem with that is if you used that number for
your planning, you could have a 50% probability of
outliving your savings.
So, what are the alternatives? Here are a couple of
options. One option is to make your best judgment of
your life expectancy projection based on your health,
family history, etc. After all, no one knows your
situation better than yourself! Otherwise, use tools
such as the "living to 100" calculator, which takes your
ethnicity, family history, health habits, etc., into
consideration and generates a more customized life
expectancy for you.
In either case, the more accurate your life expectancy
projection, the more accurate your retirement plan will
be, and the less likely you will outlive your assets!
Have a stash of cash and bonds
Keep a certain amount of your investment portfolio in
cash and bonds, like one to three years of cash in the
bank and an additional three to five years of
investments in bonds to cover living expenses.
Here's why: If the stock market craters, a person with five to 10 years of living expenses in cash and bonds
can not only cover their expenses, but also preserve
their investment portfolio as they are not forced to sell
their stocks at temporarily low values. This strategy helps to provide peace of mind.
Be honest with yourself about how much you really need to live on once you retire
Ron and Rhonda Retiree have what they feel is a
huge amount of money for retirement but have done
no planning. They tell us they can live on X amount of
their retirement portfolio each month. So, we do a
cash-flow analysis and estimate that the amount they
want, let's say around 5% annually, is sufficient for
But then it starts -- the calls to the office for extra
withdrawals. It seems they forgot to include some
regular expenses -- the long-delayed weekend jaunts
or the maintenance on the boat or annual golf outings.
They didn't consider them a regular expense when we
did the cash-flow analysis.
The result: A cash flow need estimated at 5%
annually turns into a 7%, 10% even 15%. Burning
through 5% a year was doable. But 15% is not
To be safe, consider a modified 4% withdrawal rule
Many people are familiar with the “4% withdrawal
rule,” which assured retirees that by holding their
annual withdrawals to 4% of their retirement portfolios
it would allow their portfolios to last 30 years.
However, that advice appears outdated and overly
optimistic. A “Low Bond Yields and Safe Portfolio
Withdrawal Rates” report by Morningstar found that
the modified 'safe' withdrawal rate is 2.8%, and a
retiree would be more than 50% likely to run out of
money withdrawing 4%.
Retirees should follow the modified 4% rule and
reduce the amount for withdrawals from their
retirement accounts every year after big losses or
gains in their portfolios, inflation, and other
Make sure to maximize your social security benefits
Now, more than ever, it's important for retirees to
maximize their Social Security benefits. It's a
guaranteed income stream that you've earned
through your years of hard work.
But you have to know how and when to take Social
Security to maximize your benefits. Most people are
amazed to learn there are more than 500 different
claiming strategies and more than 2,000 governing
rules. There are strategies for married couples,
divorced couples, domestic partnerships, and widows
and widowers. Some are simple and straightforward,
and some can be complicated and include multiple
You can't afford to go too conservative
with your investments
Retirees face a tough decision-making process when
it comes to their financial assets. On the one hand,
you likely want to be able to generate income for as
long as possible. On the other hand, you probably
want to know that your savings are safe.
To balance these competing priorities, you may need
to take on more investment risk than you were
Think about it this way: If your investments are
growing at a low but steady rate that just barely keeps
up with inflation, you won't see your investment
returns fluctuate much, but you'll be losing money
every year with account withdrawals. In other words,
there is a real risk that you'll outlive your assets.
A Monte Carlo Analysis might calm your fears
Named for the gambling center in Monaco, a Monte
Carlo Analysis is essentially a forecasting model that
takes as many variables into consideration as
possible, then runs repeated simulations to determine
how likely it is for this or that outcome to result from a
In terms of your retirement, a Monte Carlo Analysis
checks whatever givens are present in your financial
situation, then makes projections by taking as many
market probabilities into account as possible. It also assesses the likelihood that you will achieve your
financial goals. Typically, these probabilities include
things like interest rates, years until retirement,
spending habits and the diversity of your investment
portfolio. The result is a representation of your most
and least likely outcomes.
Consider long-term care insurance
A major reason most people fear running out of
money in retirement is an unknown major expense,
which is primarily the cost of a health issue, such as
cancer, a heart attack or a stroke.
Alas, there are a limited number of quality companies
offering this insurance, and health qualifications
continue to narrow while premiums have been rising.
Don't forget about inflation
Inflation is a risk that most people simply don't fully
consider. Even with a 3% average annual inflation
rate, the purchasing power of a dollar will fall by more
than half, after 25 years.
As you spend down your retirement savings, inflation
is costing you more money to live. Retirees should
understand the long-term cumulative impact of
inflation on their portfolio during retirement.
If you're still feeling unsure, easing into retirement could be the answer
Retirement planning in the 21st century is not an allor-
nothing proposition. If you expect to live till 100,
and if you fully retire at 65, you'd end up having 35
years of retirement! That is a long period of spending
while not earning. Not ideal for your financial wellbeing
or your personal well-being!
So, here is something to consider: Phase into
retirement gradually. In other words, do not turn on
the full-stop retirement switch yet. See if you can
scale back and work fewer hours in your current job.
Alternatively, consider working part-time at a lowerstress
job. Or pick up consulting work. Or be your own
boss and start a business.
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