Odds are you’ve thought a lot about how to save enough for retirement. Now it’s time for an equally critical step—figuring out an overall plan for how to best use those assets to generate the income you'll need during retirement, no matter how long it may last.
“In my experience, people don’t generally have a plan for generating income in retirement,” notes Steve Vernon, author of Money for Life: Turn your IRA & 401k into a Lifetime Retirement Paycheck and a research fellow at the Stanford Center on Longevity. “Once they retire, they just start spending their money—and they usually spend too much.”
The good news is that a little planning goes a long way toward reaching your retirement goals. Adhering to the following steps can help ensure that you’re able to live comfortably in retirement without exhausting your savings.
Assess your income and expenses. Your savings probably won’t be your only source of funds during retirement. Social Security, a pension or annuity, and earnings from part-time work can all help to cover expenses. Once you assess all your other income sources, you can then make an informed decision about how much to withdraw from your IRAs, 401(k) or brokerage and savings accounts to make up the difference.
“Too many people try to do the math in their heads instead of taking the time to work it all out on paper,” Vernon cautions. “They approximate what they think they’ll need—and then they end up running out of money.”
Online tools, such as retirement and expense calculators, can help you get a handle on figures such as your monthly fixed and variable expenses, how much Social Security and other income will cover and how much you’ll need to take from your savings.
Withdraw smartly. Your retirement nest egg may have to support you for 30 years (or longer!), so it’s important to be strategic about your withdrawals. Financial advisors commonly recommend withdrawing at most 4% from a diversified investment portfolio each year, with adjustments for inflation. This strategy can provide you with a steady income stream in retirement and greatly reduce the risk of depleting your assets.
“Drawing down your savings to generate income can be tricky,” Vernon advises. “If you don’t feel capable of doing the calculations yourself, you can always consult a financial advisor to guide you through the process.”
Adjust your investments. “Many people think that once they retire, they need to become very conservative with their investments,” Vernon says. “But being too conservative can hurt you. Twenty or thirty years of inflation can do some real damage to your portfolio.”
With this in mind, employ a balanced investment strategy that incorporates cash, bonds stocks and, perhaps even real estate. Having cash on hand provides you with ready access to money; bonds provide a measure of safety and income; and stocks allow for growth potential. Balancing all three will make sure you’re in good shape for whatever the future holds.