Make Your Money Last for Life

Last Updated Mar 3, 2010 10:56 AM EST

If you take care of your health, it's quite possible that you might live to 90, 95, or even 100 (see my prior post How Long Do You Have to Live?). So if you retire in your sixties or seventies, you might be retired for 20 or 30 years--or longer. That should be a good thing--except if you run out of money in your seventies!

Unless you have significant benefits from a traditional pension plan, which provides a lifetime monthly income, you should be obsessed with managing your retirement savings so you don't outlive them. Most Americans approaching retirement need this obsession, given the decline of traditional pension plans. Your goal: to spend your last dollar as you gasp your last breath. Of course, that's much easier said than done.

Unfortunately, when it comes to drawing down their retirement savings, many people simply "wing it." They withdraw what they need for living expenses and hope their money will last. Well, hope is not a good strategy!

Instead of hope, let me show you a better strategy and three methods to draw down and invest any type of retirement savings you have, whether that's a 401(k) plan, 403(b) plan, 457 plan, traditional or Roth IRA, or just a savings account that has no special tax features.

The Overriding Strategy
The most important retirement strategy you can adopt is this: Don't consider your retirement assets to be money you can spend in retirement. I know this sounds weird, but stay with me for a bit.

Let's say you have a few hundred thousand dollars or more, and because that seems like a lot, you spend money without considering how to make it last for your lifetime. Before you know it, your resources have dwindled significantly and you're faced with hard choices: return to work, drastically scale back your living expenses, or check into Club Dead.

What you should do instead is consider your retirement investments to be a monthly paycheck generator. Then, spend no more than this paycheck. Most of us live paycheck to paycheck while we're working; let's not stop when we retire.

To determine the size of your monthly retirement paycheck, use one or more of the three methods described below. These methods are designed to generate a lifetime retirement income, no matter how long you live. They might also provide protection against inflation--another important goal.
  • Drawdown method #1: Live on investment income
  • Drawdown method #2: Withdraw principal cautiously, limiting principal withdrawals each year to 4 to 5 percent of account balances
  • Drawdown method #3: Buy an immediate annuity
For many people, it might be a good idea to use more than one method. For example, buy an immediate annuity with part of your savings and live on the investment income for the remainder of your savings. And your drawdown method can change as you age. It can make sense to live on investment income in your "early" retirement years, say to your mid-seventies, and then buy an immediate annuity as "longevity insurance."

Look for future posts where I'll cover details on these drawdown methods.

Image from iStockphoto contributor kycstudio
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    View all articles by Steve Vernon on CBS MoneyWatch»
    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.

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