Odds are you’ve thought about how to diligently save for retirement. Now it’s time for a critical step: figuring out how to use that nest egg as part of an overall plan to generate the income you'll need during retirement, no matter how long that lasts.
“In my experience, people don’t generally have a plan for generating income in retirement,” says Steve Vernon, author of Money for Life: Turn your IRA & 401k into a Lifetime Retirement Paycheck and a research fellow at the Stanford Center on Longevity. “Once they retire, they just start spending their money—and they usually spend too much.”
The good news is that a little planning goes a long way toward reaching your retirement goals. Take the following steps to help ensure you’ll be able to live comfortably in retirement without exhausting your savings.
Assess your income and expenses. Your savings probably won’t be your only source of funds during retirement. Social Security, pensions and earnings from part-time work can help cover expenses. Once you assess all your other income sources, you can make an informed decision on how much to pull from your IRA, 401(k) or other retirement savings accounts.
“Too many people do the math in their heads instead of taking the time to work it all out on paper,” Vernon says. “They approximate what they think they’ll need—and then they end up running out of money.”
Online tools, such as retirement and expense calculators, can help you get a handle on figures such as your monthly expenses, how much Social Security and other income will cover and how much you’ll need to pull from your savings.
Withdraw smartly. Your retirement nest egg may have to support you for 30years (or longer!), so it’s important to be strategic about your withdrawals. Financial advisors commonly recommend withdrawing a maximum of 4 percent from a diversified investment portfolio each year, with adjustments for inflation. This strategy can provide you with a steady income stream in retirement and greatly reduce the risk of running through your nest egg too soon.
“Drawing down your savings to generate income can be tricky,” Vernon advises. “If you don’t feel capable of doing the calculations yourself, you can always consult a financial advisor to guide you through the process.”
Adjust your investments. “Many people think that once they retire, they need to become very conservative with their investments,” Vernon says. “But being too conservative can hurt you, too. Twenty or thirty years of inflation can do some real damage to your portfolio.”
With these factors in mind, employ a balanced investment strategy that incorporates cash, bonds stocks and, maybe, real estate. Having cash on hand provides you with ready access to money; bonds provide a measure of safety and income; and stocks allow for growth potential. Balancing all three will make sure you’re in good shape for whatever the future holds. A SunTrust advisor can help you determine if the strategy you’re following is the best for you.
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