Thanks to these funds, built up through a lifetime of work, Sheila and Saul (not their real names) can fund everything from weekly groceries to the European trip they took last summer to visit a niece and nephew in England.
Although Saul and Sheila are enjoying themselves, many people nearing retirement wonder whether they’ll feel so secure. In a survey of CPA financial planners conducted by the American Institute of CPAs opens in a new window last year, for example, 41% of CPAs who work with people planning for retirement said their clients’ top worry was whether they would run out of money. (Their next-biggest concern was closely related: whether they’d be able to maintain their current lifestyle and spending level.)
Nearing retirement? The good news is that there are steps you can take that may help boost the odds you’ll have a comfortable and sustainable stream of income in retirement.
Know your limits
Start by getting a realistic sense of how much money you can withdraw from your investment accounts each year.
Advisors and academics have spent years debating this issue and refining their theories in a way that takes into account the impossibility of knowing how the economy and a specific portfolio will perform over an upcoming retirement.
One general rule of thumb: If you have a portfolio that’s roughly split between stocks and bonds — say, anywhere from 60%/40% stocks/bonds to 40%/60% — if you draw out 4% of that amount the first year and adjust that withdrawal for inflation in the subsequent years, you have a pretty good chance of that money lasting for 30 years. So let’s say that you have a retirement savings of $1,000,000; that means you take out $40,000 your first year of retirement. Suppose inflation pushes up consumer prices 2% the following year
(click to see the government’s latest calculation opens in a new window).
Then the following year you would raise your withdrawal 2%, to $40,800.
Advisors say that’s typically a good starting point, though not the final word. If you expect a shorter retirement, you might withdraw more; if you’re retiring early, you might take less. And, in practice, it generally pays to adjust your spending in response to the performance of your portfolio and the economy. As Tim Maurer, director of planning for the BAM ALLIANCE puts it, “Wait for that year when you have outsized growth before you take the whole family to Disney.” More suggestions:
Consider investing for growth
Retirees have traditionally turned to interest from bonds and certificates of deposit to fund their retirement, shunning stocks because they fear a market downturn. But relying on fixed income may not be sufficient, say planners—and not just because interest rates, under 2.3% for 10-year Treasury debt as of early June 2017 opens in a new window , likely can’t sustain that 4% withdrawal rate.
Retirees need to be concerned about the threat of inflation, says David Mendels, director of planning for Creative Financial Concepts. Should the U.S. experience a replay of the double-digit inflation spikes of the mid-1970s and early 1980s, a broad-based portfolio of stocks and bonds will likely do a better job than an all-bond portfolio of preserving your purchasing power. “It’s inflation that’s the killer, not the market downturn.”
That’s why, rather than seeking income solely from interest and dividends, many planners suggest focusing on total return from a portfolio which could include stocks and bonds. Stocks, while considered riskier than bonds, usually offer greater opportunity for growth; bonds, which generally have a lower total return than do stocks, usually have lower downside risk.
When you need spending money from your portfolio—or when you have to take out a required minimum distribution from a 401(k) or traditional IRA—you may want to start by selling investments that are overweight in your portfolio. If you have a 40%/60% stock-bond mix, for example, and your portfolio is now 63% bonds, it might be a good idea to sell bonds. Re-setting your portfolio back to your target mix while getting your money out is “killing two birds with one stone,” says Maurer.