Three Ways to Make Sure Your Retirement Savings Outlasts You

One of the worst financial predicaments I can imagine is getting to retirement and running out of money sometime down the road. At this point, you'd really be in a tough place and simply have to throw yourself on the mercy of relatives, friends or the government for survival -- not a great situation no matter how you look at it.

To help ensure you never find yourself in this situation, here's an article from USA Today that gives three ways to make sure your retirement savings outlasts you. Their thoughts:

• Go variable. If you really want your portfolio to last forever, and you can adjust your lifestyle to the markets, consider withdrawing a fixed percentage of your portfolio each year, rather than starting with a percentage and increasing that amount by the inflation rate each year. Be prepared to make some big adjustments, though. Suppose you had used this strategy and started with $100,000 invested in the S&P 500 in 1995. Your income would have varied from $416 a month at the outset to $1,096 a month in 2000. This year: $769.
• Start small. A pioneering study at Trinity University in Texas looked at the success rate for different retirement portfolios during the withdrawal phase. "Success," in this case, meant having money left over at the end of the period. The study used actual returns from 1926 through 1995. It assumed that you withdrew a percentage of your portfolio at the outset and then increased that amount each year for inflation. The findings: If you adjust your withdrawals for inflation and maintain a portfolio of 75% stocks and 25% bonds, your initial withdrawals should be 4% to 5%. The 4% initial withdrawal had a 98% success rate; at 5%, the success rate fell to 83%.
• Annuitize. An immediate annuity is fairly simple: You give the annuity company a chunk of money, and it guarantees payments that last your lifetime. You can also get payouts based on the lifetime of you and your spouse, or for a certain number of years. The drawback is that your payments remain the same. The Vanguard Group offers an annuity with an inflation rider: Payments increase in line with annual changes in the consumer price index. A reasonable approach might be to put part of your savings in an immediate annuity and tap your savings when needed. And if you're going to do any juggling in retirement, do it with your finances.

Of all these, I think option #2 is the one I like the best. I also plan to save based on wanting income at one level but plan to live below that level in retirement, thus giving myself a margin of safety. Yes, spending less than you earn even works when you're in retirement. ;-)

Comments

[Ed]

Here in the Philippines we have a product that doubles your money in five years with interest paid monthly. It is like an annuity but with more flexibility as one can withdraw anytime, with penalties, of course.