Retirement spending: Follow the crowd and you'll go broke

A new census report says more Americans than ever are living past age 90.

One of the most important retirement planning decisions you'll have to make is how to deploy your IRAs, 401(k) accounts and retirement savings to generate a lifetime retirement income. When it comes to important decisions like this, many people make choices based on what their relatives, friends and neighbors do. They use the "follow the crowd" method of decision-making. With retirement planning, however, that would be a bad mistake.

When people approaching retirement are surveyed about how they plan to use their retirement savings to generate retirement income, the most common method cited is just to spend the money as needed to cover their living expenses. For example, in a recent survey conducted by the Society of Actuaries, the most frequent response selected -- by 36 percent of retirees and 39 percent of pre-retirees -- was to spend their retirement savings as needed, with no set plan. Only 11 percent of pre-retirees and 17 percent of retirees had good answers: Only withdrawing the interest or dividends earned each month.

The results from a recent Vanguard study are even scarier. When asked about strategies they would use to guide their withdrawal decisions from retirement savings, 37 percent of people surveyed -- again, the most frequent response -- said they would base withdrawals on living expenses. Another 21 percent have no formal approach, and 10 percent would use gut feelings. Fewer than one in ten people appear to have a formal withdrawal rule in place. Yikes!

These survey results are consistent with personal stories I've heard from family members and attendees of my retirement planning seminars. I constantly hear about people who retire with what seems like an adequate amount of savings, and then just spend whatever they need from their savings to cover their living expenses. They've made no plan to make their savings last for the rest of their lives. Invariably, these people exhaust their retirement savings in their 70s and are now living with their kids, or they've gone back to work to make ends meet.

A much better approach is to think of your retirement savings as a monthly paycheck generator. Then set up your accounts in such a way that the paycheck generated draws down your money in such a way that your savings last the rest of your life. Then spend only your monthly paycheck.

The best ways to generate lifetime income
IRAs and 401k: 3 ways to generate lifetime retirement income

By blindly following the crowd, you do yourself -- and your retirement years -- a great disservice. Instead, why not try breaking out and creating a plan for your money that works best for you? You'll thank yourself later when you have money to spare.

  • Steve Vernon On Twitter»

    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.