Increase Your Odds of Surviving Retirement

Last Updated May 11, 2009 6:33 PM EDT

The collapse of the financial markets has many retirees worried about running out of money, and for good reason. Stock values are down about 40 percent and interest rates have tanked. That's a double whammy if you're trying to live off the returns from your savings.

The key to getting through this crisis is to cut the distributions you're taking from your retirement savings. While there are no guarantees, dropping your distribution rate is the most productive thing you can do to improve your long term financial security.

For every one percent you reduce your distributions, you substantially increase the odds of making your money last. Merely dropping your distribution rate from five percent down to four percent can improve the odds of making it through a typical 30 year retirement by about 25 percent.

You've got two tools at your disposal to help you reduce your distributions: part-time work and iron fist budgeting.

  • Part Time Work. Any income you can generate from a job lessens the amount of money you have to take from your retirement savings. For instance, assume you've got a $500,000 portfolio. If you can earn $10,000 from part-time work, you could drop your distributions by $10,000, which is two percent of your portfolio value. Doing this until the markets recover can make a huge difference in your long term survival. I know it's a tough economy, but even a small amount of income will help.
  • Iron Fist Budgeting. You've got to manage your household budget with an iron fist. For retirees who are under pressure, this isn't the time for loose spending habits. Get a handle on all of your expenses, and cut what isn't necessary. Every dollar you cut is one dollar you don't have to take from your retirement plans. Again, assuming you have $500,000 of savings, if you cut your living expenses by $5,000, that's one percent less you need to take from your retirement savings.
Bottom line: You can get through this market decline if you want it bad enough. Use part-time work, budget cuts, or a combination of both, to drop your distribution rate. Then wait for the markets to recover.

As with all financial decisions, talk to your advisor about your particular needs.