(This article appeared previously on MarketWatch.com.)
If you haven’t figured it out by now, you soon will: Building a nest egg is (relatively) easy; tapping that same nest egg in retirement so that it lasts as long as you do is the hard part.
Three steps can help you achieve that goal.
Most investors, when they begin trying to create a steady stream of income in later life, quickly come face-to-face with a host of unknowns: market returns, inflation, healthcare costs and life expectancy, among others. Each of these factors makes it difficult to determine how much money you can safely withdraw from savings over a retirement that could easily last 30 years.
But as Walter Updegrave reported recently in The Wall Street Journal, several steps (and tools) can help you avoid depleting your nest egg too early in the game — or, conversely, stinting so much that you aren’t able to enjoy retirement.
1. Budgeting The first and most important step is getting a good idea of what your expenses will be after you leave the office.
Two online tools — Fidelity’s Retirement Income Planner or Vanguard’s Retirement Expenses Worksheet — can help you set a retirement budget. And be sure to differentiate between essential outlays (think housing, transportation and health care) and discretionary outlays (like those European river cruises). The latter will be the first place to cut if you need to pare spending.
Along with budgeting, run your Social Security numbers. The Social Security Administration can help you determine your payouts at various ages, and services like T. Rowe Price’s Social Security Benefits Evaluator (free) or SocialSecuritySolutions.com (for a fee) can help you identify the best claiming strategies.
2. Annuities No, these products aren’t perfect. (Some come with steep fees.) But immediate annuities, in particular, which tend to be relatively simple and cost-efficient, can help bridge the gap between what Social Security will cover and what you need for essential expenses. Check out how much you might receive at immediateannuities.com.
With a budget and an annuity strategy in place, you can select a withdrawal rate from savings. Four percent a year has long been regarded as — and remains — a good starting point. Three percent is safer. Go beyond 5 percent and your chances of running out of money rise dramatically.
3. Fine-tuning All this effort will go to waste if you don’t review your spending and portfolio on a regular basis — at least annually.
Calculators that rely on so-called Monte Carlo simulations, which examine a vast range of possible financial scenarios, can help you determine if you need to adjust your withdrawals. Again, such tools are available on both Fidelity’s and T. Rowe Price’s websites.
Glenn Ruffenach edits The Wall Street Journal’s guide to planning and living the new retirement. Reach him at email@example.com.
This article is reprinted with permission from MarketWatch.com. © 2013 Dow, Jones & Co., Inc. All Rights Reserved.