Five ways to make your nest egg last a lifetime

From MarketWatch

Challenging the conventional wisdom on retirement savings

BOSTON (MarketWatch) -- Back in the good old days, before the crisis of
2008-09, many experts suggested that all you needed to do was withdraw
4% per year, adjusted for inflation, from your nest egg. That strategy,
experts said, was a near guarantee that your nest egg would last a
lifetime.

Well, go tell that to the guy selling apples and pencils on the street corner.

 

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Yes, conventional wisdom has proven to be
more conventional than wise. And now everyone is trying to figure out
the best way to turn a nest egg into an income stream that will last
throughout retirement. And that includes AARP, which this week released
two tip sheets that "challenge conventional thinking and offer general
guidance about how to make the best decision for you and your
circumstances."

One of the tip sheets, "Making Your Nest Egg Last a Lifetime," which
was written by Anthony Webb of the Center for Retirement Research at
Boston College, suggests the following:

1. Delay claiming Social Security

Retirees and would-be retirees need to consider matching their fixed
and, best-case, inflation-adjusted sources of income against their
fixed expenses. And one way to create the best inflation-adjusted
source of income at the moment is to delay taking Social Security for
as long as possible, certainly at least until your full retirement age
if not longer, said Janet McCubbin, director of financial security at
AARP's Public Policy Institute.

At the moment, many people claim Social Security -- even though it
means a reduced benefit -- at age 62, using the faulty logic that they
may not live past the so-called break-even point. The break-even point
is the date at which the sum of your reduced early benefits no longer
exceeds what you would have drawn with the heftier, delayed benefits.
(There are plenty of Wed-based calculators to help you figure your
break-even age.)

But such calculators fail to address at least three issues. One, the
calculators typically don't address married couples. As is well known,
husbands tend to die before their wives. And that means husbands who
take a reduced Social Security benefit ultimately reduce their
surviving spouses' benefit as well. Two, predicting your life
expectancy is nearly an impossible task. And three, creating the
largest Social Security benefit is fast becoming a basic component of a
sound retirement-income plan.

"Delaying is like buying extra income that lasts a life time," said
McCubbin. "For most it's optimal for the husband to wait to collect
till at least full retirement."

You can use the
Social Security Administration's calculators to find your normal
retirement age and estimate your monthly benefit at this Web site.

2. Consider purchasing an annuity

It's not right for everyone, said McCubbin. But for those who are
retiring with a large nest egg and who don't have enough fixed and
guaranteed sources of income to match their fixed expenses, an annuity
might fit the bill. In essence, you want a fixed and dependable stream
of income that covers your basic living expenses, she said.

According to AARP, an annuity would not, however, be appropriate for
someone with little in savings or someone with a large share of
preretirement income already replaced by Social Security or by a
traditional pension plan.

Annuities are not without their problems at the moment. Pricing is
affected by adverse selection, for instance. But McCubbin said much is
going on in the way of product development that could make annuities
more widely accepted over the next few years. Such developments include
in-service annuities, trial annuities and security-plus annuities, as
proposed by the Aspen Institute.

You can use this AARP Web site to figure out your sources of retirement income.

3. Pay down your mortgage

Many would-be retirees should enter retirement debt-free, owning their
home free and clear, according to McCubbin. Unfortunately, many
would-be retirees pay little attention to their homes as an integral
part of their retirement-income planning process. In fact, most people
age in place until they become sick or a spouse dies and then they
decide to sell their home, according to AARP.

Instead, homeowners should analyze far in advance their living
arrangements and whether they want to have a mortgage in retirement.

According to AARP, some retirees might also want to consider whether a
reverse mortgage is appropriate as well. A reverse mortgage is a
complicated and sometimes expensive transaction so it's wise to get a
handle on the pros and cons of such products before signing any
contracts, AARP said.

Read related column at this Web site.

4. Allocate your assets wisely

Many retirees place large portions of their nest eggs in investments
that provide a guaranteed return on capital. According to conventional
wisdom, retirees should rebalance their nest eggs in favor of bonds as
they age. But AARP's view is that retirees should build portfolios that
are broadly diversified and based on one's tolerance for risk.

Read related column on the subject.

5. Withdraw funds carefully

And that brings us back to the place we began. Conventional wisdom
suggests that you should withdraw no more than 4% of your savings
during retirement. But now, at least according to AARP, retirees need
to be a bit more thoughtful and flexible about this.

"In tough economic times, you may want to withdraw a smaller percentage
of your savings, if possible," AARP said. "When the returns on your
investments improve, you can increase your withdrawals. Given the
fluctuating nature of this income stream, consider pairing this
changing income stream to variable or lifestyle expenses, such as
gifts, vacations, etc."

What's more, AARP suggested that the amount retirees ultimately
withdraw should be based on realized returns, not rules of thumb.

It's not easy to make your nest egg last a lifetime and the process is
only likely to get harder. But AARP's five suggestions are certainly a
step in the right direction.

Read AARP's tip sheet at this Web site (pdf).

Robert Powell is the editor of Retirement Weekly. Learn more about Retirement Weekly here.

Robert Powell has been a
journalist covering personal finance issues for more than 20 years,
writing and editing for publications such as The Wall Street Journal,
the Financial Times, and Mutual Fund Market News.