How to prevent your retirement savings from running out

With some experts warning that $1 million in retirement savings might not even do the trick these days, it’s understandable if you’re kept up at night wondering: Will I have enough?

Here’s another question worth asking: How should I spend what I have?

A good answer to the latter can help you with the former.

Whether your nest egg is $1 million, $250,000, more or less, you’ll need to devise a smart strategy of how to spend your money so that you don’t outlive your savings. “Withdrawing too much money early in your retirement can have a devastating effect on your standard of living,” said Arielle O’Shea, a retirement and investing expert at personal finance website Nerdwallet.

On the other hand, O’Shea said, you don’t want to be led by fear. “Being too conservative could mean you don’t enjoy these years you’ve worked so hard for,” she said.

Below are some time-tested ways to spend your retirement savings.

Now retired financial advisor William Bengen came up with the so-called 4% rule almost two decades ago. It’s still in circulation.

It’s simple: You draw 4% from your savings in your first year of retirement, and then adjust that amount for inflation every year thereafter.

For example, imagine you have $800,000 in savings. In your first year of retirement, you’d withdraw $32,000. If inflation was 3% for the year, the following year you’d take out $32,960. (In other words: 4% of $800,000, which is $32,000, plus 3% of that $32,000, which is $960, for a total of $32,960.)

“It’s a good starting point, especially for someone doing their own planning,” said certified financial planner Brad Bobb, owner of Bobb Financial in Springfield, Illinois.

Of late, however, some experts say retirees might not be able to depend on the strategy. “The 4% rule hasn’t really been tested against such low interest rates,” said Wade Pfau, professor of retirement income at the American College for Financial Services.

Most experts agree that retirees will need a portion of their savings still invested in the stock market, where returns are typically higher in the long run than those produced by bonds or certificates of deposit. Even so, not all nest eggs will be able to endure a 4% annual drain.

And for those with really large savings, the 4% rule could leave you living more frugally than you need to. “The goal is not to die the richest person in the graveyard,” said Allan Roth, CFP and founder of financial advisory firm Wealth Logic in Colorado Springs, Colorado.

Another issue with this tool? It’s awfully rigid, said Colleen Jaconetti, senior investment analyst at Vanguard. There are a number of factors that can make your budget vary from one year to the next, including health care and travel expenses and when you claim Social Security.

“Every individual’s needs are different and it’s likely that their annual spending will fluctuate throughout retirement,” Jaconetti said.

Some retirees prefer a dynamic spending strategy, which “provides retirees with the flexibility to account for unexpected expenses or rocky market conditions,” Jaconetti said.

With this technique, you might still begin your retirement at a 4% withdrawal, but you can also establish a withdrawal “ceiling” and “floor” rate — the most and least you’ll take out in a given year.

For example, say you have a $1 million nest egg. Your maximum annual withdrawal might be 5%, and your minimum could be 2.5%.

“One of the drawbacks of the 4% rule is that annual withdrawals from the portfolio are indifferent to the returns of the capital markets,” Jaconetti said. The dynamic spending strategy, she said, offers an antidote.

For example, if the market dropped 20% in a year, a retiree might slash spending by a fifth for a few years. Or he or she could permanently cut spending by a smaller percentage, say 3%.

“In short, this rule helps retirees maintain income for basic expenses while allowing for more discretionary income if market returns are favorable,” Jaconetti said.

The strategy might be unnecessary for retirees who really do anticipate a consistent overhead.

A third spending tool is the bucket strategy, which divides your retirement savings into segments, said Jon Beyrer, CFP and director of wealth management at Blankinship & Foster in Solana Beach, California.

He says there are typically two buckets: one for withdrawal, one for growth. “These could also be called a short-term bucket and a long-term bucket,” Beyrer said.

The withdrawal bucket should have enough to cover your annual expenses for a set period of time. For example, if a retiree needs to take out $50,000 a year, and they want the money to cover five years, the bucket should have at least $250,000. “The withdrawal bucket will typically be invested in low-risk, highly liquid investments such as high-grade bonds and money market funds,” Beyrer said.

The timeline with this strategy is less overwhelming than with the 4% rule, Beyrer said. “By having rules about how many years worth of spending should be in the withdrawal bucket, the retiree is more tuned into what their withdrawals need to be,” he said.

The other bucket will be for long-term growth. “The investments in this bucket can include higher-risk, more volatile investments such as stocks,” he said.

It’ll be important for retirees to strike a balance between the two buckets, to make sure they’re not being too conservative or too risky. The strategy can also get complicated fast.

You might have more than two buckets: one for emergency savings, or one for children and grandchildren. “Lifestyle buckets like travel or philanthropy force some discipline on how much to spend on those items,” Beyrer said.

A big advantage of the strategy, he said, is that it reduces people’s risk of making regrettable moves with their savings.

“When a retiree knows their withdrawal bucket is secure, it’s easier not to panic in the face of bad stock market news,” Beyrer said. “It gives retirees peace of mind.”

Some retirees might want to use the IRS’s required minimum distributions tables for individual retirement accounts and 401(k) plans as guidance on how to spend down all of their savings, including any brokerage accounts or certificates of deposit.

An RMD is the amount you’re required by the government to withdraw each year from your IRA (but not Roth IRAs, which have no required withdrawal). The mandates kick in the year you turn 70½. (The number is calculated by dividing your account balance as of Dec. 31 of the prior year by the IRS life expectancy tables.)

So let’s say you have $1,000,000 saved. If you don’t have a spouse, and were born in December of 1953, your first RMD would be roughly $50,500, according to calculations on the Charles Schwab website. Assuming an annual return of 6%, your nest egg shouldn’t dry out until after your 115th birthday.

Check out this handy calculator to figure out your math.

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