8 Ways to Make Your Nest Egg Last LongerThis article is a reprint from the Financial Planning Association. The focus of retirement planning traditionally has been on building a sufficient nest egg to live on once you retire. But as we approach retirement in increasing numbers, research is beginning to focus on an equally important issue: how to protect and draw from that nest egg in ways to see you all the way through retirement. Here is some of the current best advice among financial planners on how to make sure your nest egg lasts a lifetime. 1. Plan on living longer. Financial planners used to project a retirement portfolio's lifetime out to age 85. No more. Planners routinely plan on clients living to age 95 or 100. Surprisingly, it doesn't take that much more money in a portfolio to help pay for those additional years, but you still should include it in your withdraw calculations. 2. Health worries trump longevity. While people typically worry about "outliving their retirement money," the bigger worry for many financial planners is, as one financial planner put it, "outliving your money in ill health." As a consequence, planners are putting increased emphasis on long-term care planning, including the purchase of long-term care insurance. 3. Withdraw conservatively. The more important your nest egg is for funding your minimum living expenses in retirement, the more conservative you should be in making withdrawals, suggest many planners. Recent research has indicated that retirees can "safely" withdraw a dollar amount based on 4 to 4.5 percent of the value of their portfolio at the beginning of retirement, with the withdrawals adjusted annually for inflation. Take out a higher percentage and you risk eventually draining the portfolio dry due to the inevitable stretches of down markets. Some planners feel that retirees can start out at a higher withdrawal rate, say six percent, but must be willing to reduce the rate if there is an extended stock market setback. The key point is that you shouldn't start taking out annually what you predict will be the average return of your portfolio during retirement, such as eight percent. Studies overwhelmingly show that retirees quickly run out of money if they take this approach. Whatever spend-down rate you choose, it's critical that you monitor your portfolio annually. 4. Stocks remain important in retirement. Virtually every retirement portfolio study these days confirms the need to maintain a larger portion of stocks in your retirement portfolio than in the past. This is due primarily to the reality that people are commonly living 20 to 30 years or longer in retirement, and they need the growth of stocks to keep them ahead of inflation. 5. Keep cash in the portfolio. More and more planners are recommending that clients keep three to five years in low-risk liquid assets. This might be one to two years in cash and cash equivalents such as certificates of deposit, and perhaps another two or three years in bonds that will mature during that time. This way, retirees won't be forced to sell stocks during down markets for living expenses. Cash reserves are replenished by the sale of stocks during good markets. 6. Consider immediate annuities. Planners generally have not been fans of using annuities to build a retirement portfolio, but many are becoming fans of using immediate annuities for making distributions from nest eggs. With an immediate annuity, you invest a portion of your portfolio in an annuity that immediately begins making monthly fixed payments for as long as you live—a compelling feature in light of increasing longevity. The size of the payment is based on how much you invest, current interest rates and your age. 7. Control spending. Retirees can't control market volatility, but they can control their discretionary spending. Planners are putting increased emphasis on smart budgeting during retirement, particularly for variable expenses such as vacations and new cars. 8. Consider working. Working during retirement may sound contradictory, but planners often encourage clients to work at least part time, perhaps at a "dream job" they couldn't afford to pursue before retirement. Working part-time provides not only psychological rewards, but goes a long way toward reducing the risk that your portfolio will run out of money. Have Something to Say? | ADVERTISEMENT  |
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Posted: Nov 6, 07 3:54pm
There is one "sure fireway" to make the nest egg last longer ...become debt free..before you retire.
That includes:
- no credit card debt you can't clear in 90-days
- No mortgage
- No home equity
- no car payments (includes lease)
- no college loans for kids
- no old medical bills
THEN ..learn the meaning of the word "NO"...! Pay all this stuff off while your working or, make it the very first thing you do when you retire (remember to allow 25% for taxes).
Posted: Nov 14, 07 6:44am
Being debt-free always strikes a noble chord when discussing money management strategies because at face value you are not paying the finance charges or interest on loans. This is also a good "balancing perspective" because it draws attention to the area of debt and credit card abuse which is admittedly rampant in this country.
However, whether it is use of debt/credit cards, investing, saving, buying insurance, or making any significant purchase, my suggestion would be "moderation in all things". The reality of being debt-free by retirement might truly make your nest egg last longer than it would have with some debt, but isn't also a question of having the appropriate size of nest egg going into retirement? If you have paid off your house, cars, credit cards, personal loans, etc., etc. before retirement I would submit that you will have significantly less to live on. And if the remaining balance will only provide half of what you need to live on, have you really gained anything? True, without the debts going in the theory is you can live on less, but with most retirement planning involving at least 20 or more years, will you be able to really pay off everything in 90 days? Are you going to drive the same car for 20+ years? Will your health care coverage pay 100% of everything? In my opinion, there should be a balance between paying everything off and having saved/invested enough to support your desired lifestyle for the length of your retired life. If you are prudent in your use of debt and live within your means, I think you will be better off in the long run. This is an individual decision, obviously, as everyone has their own set of circumstances, so I think that a categorical recommendation for everyone needs to be taken "with a grain of salt" as they say.
Posted: Nov 14, 07 8:30am
For RSG Kansas ..
That is nearly the "exact mindset" my dad had as he went into retirement. I was also privy to his balance sheet (budget) and pointed out to him that debt accounts for nearly 20 to 30 percent of his monthly cash flow and the interest he was paying "is money down the tubes" that he dosen't have to live on in retirement.
Your words council people to "bring debt", matter of factly, into the equation of retirement planning and their cost of living while in retirement. That is a False - Positive statement because debt is a "negative" factor on cash flow. Interest yields no ROI.
Simple arithmetic clearly illustrates that debt is a combersum burden while in retirement.
I on the other hand, understand simple arithmetic and refused to be socialized into thinking that debt in moderation is acceptable. It is not acceptable because it works negatively on renewable cash flow and can not "earn" new money.
Therefore ..my 401K and IRA continue to produce yields greater than a person who takes capital out of the investment to meet monthly cash demands or spends new dividends and earned interest on debt.
My greater yields allow me to "force or create" new abstracts on new cash requirements,
Example: I spent $44,000 on a new 2003 Chrysler T&C Limited van the month in which I retired. I financed that vehicle at 0% interest for 60 months. I earmarked $44K in my IRA as "van capital" and if I choose, I could pay cash for the van and have no van debt. But because i could "clear the debt instantly" ..I was able to create a capital cash environment wherein I increased the value of my "debt dollar" by nearly 8%. By doing the average of averages on a flat 12% annual ROI (my proven average ROI overtime) I was able to make 5 annual withdrawals to pay down the cost of the van.
OK ..I am not a wiz-bang bean counter and my formulas are just "mostly correct". But, I was in a positive cash flow position that allowed me to increase the value of my dollar by 8%. Which means I only spent $.92 on the dollar, in real money, to pay for the van.
That example is to illustrate the value of "socializing" a person into thinking terms of growth and not debt. Being debt free can easily be achieved if people would only think in terms of value added growth vs. negative value growth.
For me, it was a great feeling of accomplishment to pull this off. It was wonderful to know that I could "earmark" money for creative finance and not have to take dollars from my cash flow to pay on debt.
Posted: Nov 14, 07 7:38am
I would like to take issue with a few of the points of RSG's comments. He isn't calculating into the equation the fact that if you have everything paid off, you will have the ability to save tremendous amounts of money. That is, if you are the kind of person that saves rather than finding something new to spend on. Just because you can afford a McMansion, doesn't mean you have to live in one. Just because you can afford to take a cruise, doesn't mean you can't live by Dorothy's rules - "There's no place like home, Auntie Em!" A car can last seven years instead of five. Just because the neighbor bought a new one, doesn't mean you have to.
In my case, my overhead is as close to nil as it is possible to get it because everything is paid off. Not only are there no interest charges, all the money that would have gone to pay off car loans and mortgage is free to be saved so that I will have the the possibility of the best of both worlds - low annual expenses and high income. I save mortgage and car payments in an interest-bearing account.
My next $25,000 car will cost well under $25,000 in two more years when I go to buy it because of interest earned on the principal I paid to myself. My "mortgage" payments I am making to myself on my paid-off house (interest and principle - I still must pay the property taxes) bought me two condos in cash - for rental - by virtue of the fact that I saved the payments I would be making to someone else for over 8 years.
Income is always finite. Money spent on interest is money you may as well have burned - if there was a way to avoid it. A paid-off $250,000 house might be far better for many reasons that a $500,000 house with a big mortgage and your cash in stocks. The amount spent for interest in the first five years could have paid off two cars and tuition to college for your brainiac kid! Financial advisors can make numbers look impressive but the fact is: You can't unspend interest. You will pay out more than you could possibly earn because banks, like prostitutes, charge what the market will bear and return as little as possible for your investment! And, at least the prostitute will give you a kiss on the cheek when you have completed the transaction. What will your banker give you?
Not everyone needs to have a million dollars in paying assets to enjoy a strong and healthy retirement. For instance, let us say that either my wife or I die, dramatically reducing pension income for the survivor. The survivor could sell our paid-off house at over double what we paid for it - even in a slumping market - and live in one of the inexpensive but lovely condos that we now rent out. It has low taxes, reasonable condo fees and zero overhead - utilities and even cable TV are included in the condo fees. And right now, my current property taxes and condo fees would pay all the costs of living in the condo ... three times over! I could live and eat the best quality cat food - IAMS!
There is no one method for making life comfortable at the far end. When you are frugal, you plan ahead and do not depend on the vagaries of the stock market or some financial advisor whose interests are putting food on his table as well as yours ... using your money to do so. You may prefer stocks. If so, go for it. Then get the best advice you can. You may fear stocks as I do. If so, find yourself a viable alternative.
Had I not bailed out of the stock market when I did a few months ago, I wouldn't have been able to buy the two condos. My losses, though possibly temporary, would have left me with a much smaller equity. I have no plans to sell the condos but I could flip them in a few years if I needed the cash. In the meantime, they provide rental income and equity that may grow over the years.
This was my way. I learned by experience to trust financial advisers about as far as I could toss them against a high wind. Twice burned, forevermore cautious.
Our income made this plan viable for us because it will include several pensions that come with a lifetime guarantee (state and federal, fully paid and vested - even W couldn't mess them up). That puts a floor on our income that allowed us to find our own path.
Beware of anyone who points to a single path to your best interests - "My stock plan is the best in the world and will make you money. There are tons of unscrupulous people out there). You can rest assured, that person has his own seat planted firmly in the middle of your path. There are many roads to Rome and each starts under a different premise. How you live your life at 50 dictates what you have to do to protect 85, not some rule-of-thumb that may or may not fit your specific patterns.
However, whatever your position or age, you do need to plan for your future. It will come whether you like it or not and how well you cover your possibilities is how well you will live in the years that you have to depend on assets to have a viable income.
Create your formula from your own experiences and don't be afraid to seek outside guidance, but keep your own finger on the trigger ... or you may find the gun pointing at you! Also, shift your plan with the conditions. If you have low pension expectations, you need more income later. Prepare for it. If you have locked-in, guaranteed pensions, you are free to use that base number as fixed income and plan over and above it for anything else you may need.
Whatever you do, do NOT retire until you are ready. Life after retirement can be wonderful or bleak ... according to what you put into it. All those years, you had structure - work, kids, study, brief vacation ... One morning you wake upo. The kids live in Iowa, your spouse has forty groups she belongs to and is never home - you never noticed because you were never home - and you have nothing to do ... until you plan it on a daily basis. How you plan your time will be far more important on an immediate basis than what to do with your money. Many people die shortly after retirement. They had a purpose which they do not replace and they simply fade away.
Don't allow that to happen to you.
Posted: Nov 14, 07 8:38am
Great ..Great ..Great ...! I just freak'in love it ..!!
This is my inspirational thinking I always say to my self and shock people when I say it out loud to them ..." I love spending other peoples money",,,!!!
Posted: Nov 23, 07 2:10pm
I think Milt T and Badfrog have missed one major point about debt. Debt CAN BE good if it is used to purchase an appreciating asset or to eliminate a higher interest loan.
Also, the vast majority of us WILL NOT save the extra, we just find different ways to spend. I find many people can have more sucess at resisting that impulse if they have written goals and a plan to get there.
Posted: Nov 23, 07 2:53pm
I worked for a bank .. I was trained in bank products ..I was made "privy" to the strategy behind commercial and consumer lendiing .. I learned why all customers hate banks ..I learned my lessons very well .." I was an honor student" ..I ran with this knowledge and "reversed the game"..to my advantage ..!
- God Bless the "brain he gave me" ..!
- God Bless Compound Interest..!
- Thank you God ..for giving me life as a Baby Boomer and to be more greedy than my peers ! That means, "save your money stupid" and in the end, the Baby Boomers will pay for you to retire and with a little luck, retire at 55 ..
God Bless "other peoples money"..!
God Bless me ..I did it ..!
I am so glad that I "realized" more than 25 years ago that American Society purposefully "socializes it citizens" to spend..spend ..be in debt ..invent way to be in debt ..BUT don't save your money because you'll need that to pay your debt..!
The powers to be in America "do not want to share" the secret of compound interest and capital growth. They want it all for themselves ..except me ..I want it all for me .. " I love your money" ..!