By John R. Berry
How can I make sure I don’t run out of money in retirement? This is a common fear among savers and investors, especially those close to turning in their resignations.
Concerns about outliving one’s money are reasonable. After all, as a person ages he or she is less likely to have the health or ability to go back to work if needed.
Sometimes, though, savers worry too much or even too little about running out of money. These extremes are most worrisome for a financial planner. First, there are those who have a large sum saved but are fretful about indulging in the great joys of retirement like travel or hobbies. Others spend too much in the early years of retirement and don’t concern themselves enough with their later years.
Financial planners can implement any number of strategies to help clients try to stretch their spending over their expected lives. Specifics depend on two basic things: resources and anticipated needs.
Break out the buckets
A strategy that we use often is the bucket strategy. Imagine an old school bucket brigade fighting a fire from a reservoir. The reservoir is your pool of money. Resources are drawn from the reservoir and eventually make their way toward the current need, which in your case is not a fire but your lifestyle demands.
I commonly use a three-bucket approach, where clients’ short-term needs (up to 5 years) are in less volatile investments like cash and bonds. Mid-range needs (up to 10 years perhaps) are invested moderately, and then the longer term bucket (the big reservoir) is growth oriented. This tactic stabilizes money that clients will need soon while hopefully keeping some funds growing to at least stay with or even beat inflation. After all if you retire at 65, you might easily live 25-35 more years, and a dollar today will not have the same purchasing power in three decades.
Putting it into percentages
Another retirement “drawdown” strategy you may have heard of is the 4 percent rule. This involves withdrawing 4 percent of your nest egg the first year of retirement, then an inflation-adjusted amount for at least 30 years thereafter. The 4 percent rule has been studied thoroughly and holds up fairly well as long as your portfolio is invested within its parameters.1
As a practical matter, I find that most people think in dollars, not percentages. This makes the bucket approach easier to visualize, although I often reference the 4 percent rule of thumb to help people think about how much they can draw off an invested lump sum. (If you have $300,000 you’re less likely to come up short if you withdraw $12,000 a year rather than $30,000.)
Ultimately the best retirement spending plan is one that allows you to live your best life possible while sleeping well. It is imperative, however, to have a plan, preferably a written strategy that maps out your next several decades as best you can. This guiding document will take into account not just your investments but other sources of income like Social Security, pensions, royalties, and part-time work. Thoughtful use of those resources can help stretch your savings and give you an income floor.
What’s the best strategy to avoid running out of money in retirement? Know how much you can spend each year, and if you potentially have several decades to live, keep a good part of your nest egg invested and growing to benefit your future self.
Certified Financial PlannerTM professional John R. Berry owns Corner Post Financial Planning.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.
Citations:
1) Michael Kitces, The Ratcheting Safe Withdrawal Rate – A More Dominant Version Of The 4% Rule?” Kitces.com accessed 2/19/2019.