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How to make sure your retirement fund lasts as long as you need it

Reaching retirement can free you from the daily demands of working life, but it may also present you with a daunting challenge: trying to make sure your assets can support you for as long as you need, and that could be as long as 30 years.

Unlike your working years, when the key to achieving a better standard of living is usually to earn more income, money management in retirement focuses on making the most of what you have, and making it last.

1. The rate of return you can realistically expect your investments to earn over time. Factors include the types of assets in your portfolio, economic conditions, market fluctuations, etc.
2. The effects of inflation on your purchasing power. The inflation rate, while relatively low recently compared to historical averages, has averaged around five percent annually over the past 30 years, according to the Consumer Price Index (September 28, 2000).
3. The number of years you expect your retirement to last. According to the U.S. Department of Health and Human Services, life expectancy for the average American is around age 76 and is expected to rise to 78 by the year 2025.

Based on your estimates and the size of your retirement portfolio, you can determine how much to withdraw each year to provide the income you need. For example, suppose you have a nest egg of $350,000 at retirement and anticipate a 7 percent annual return, perhaps you withdraw $21,000 the first year (6 percent of $350,000), and increase withdrawals each year to account for inflation, you can expect your money to last 22 years. (These hypothetical rates of return are for illustrative purposes only and are not meant to represent the past or future returns of any specific investments or investment strategy, or to imply any guaranteed rate of return.)

Customize your distributions

Different distribution options can help you make the most of your retirement account. For example, you might choose to take a portion of your investments as an annuity that generates income payments immediately, while leaving the remainder in your retirement account to offer better protection against inflation and continue growing. This guarantee is based on the claims-paying ability of the insurance company.

Depending on the type of annuity you select, this could shelter you from outliving your portfolio. Variable annuities are complex investment vehicles. Before you invest, be sure to ask your sales representative about the variable annuity’s features, benefits, risks and fees, and whether the variable annuity is appropriate for you, based upon your financial situation and objectives.

April 19, 2001

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