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Financially Speaking

Make Your Money Last a Lifetime

3 ways to stretch your savings in retirement

  • Keys to retirement planning: save more, spend less, diversify investments.
  • Withdraw no more than 4 percent from retirement savings in the first year.
  • Use one of the three spend-down strategies below to create lifelong income.

En español | Last year, my husband and I ran a "how are we doing" test. If we quit working, how much could we reasonably take from our savings each month, consistent with our personal and family goals?

See also: Don't make these 5 common financial mistakes.

Both of us had left longtime jobs behind. We have new projects in hand — including, for me, this monthly personal finance column. Still, we needed a reality check, given the hit that the equity portion of our investments has taken in the past decade. If we went into spend-down mode — living only on savings, Social Security and incidental income — what would our future be?

As I studied it, I thought of the famous essay by Isaiah Berlin about the hedgehog, who knows one big thing, and the fox, who knows many different things.

You're a hedgehog when you're saving money for retirement. The single, simple path is the same for everyone: save more, spend less, diversify your investments.

When you start living on your savings, you're a fox. There are various paths to consider, depending on your age, health, savings, pensions, legacy goals, family circumstances, risk tolerance and market conditions. If you spend too much early on, your money might not last for life.

Fan of dollar bills-How to make savings last

Plan on withdrawing no more than 4 percent of your savings during your first year of retirement. — Photo by Florence Delva/Getty Images

If ever there were a time to consult a financial planner, this is it — when you are wondering if, and when, you can afford to retire. You need someone to run the numbers, under various saving and investment scenarios, to help you match your future spending to your available income. (Please choose a fee-only planner, who charges only for advice and doesn't also sell financial products.)

The magic number is 4 percent. You should plan on withdrawing no more than 4 percent of your total savings in the first year. For simplicity, take it in a lump sum, deposit it in the bank or money market mutual fund and budget it for paying 12 months' worth of bills.

In each following year, raise your take by the percentage increase in inflation. This way, your money should last for 30 years, assuming that you start with a portfolio invested half in diversified stocks or stock mutual funds and half in diversified bonds, with dividends reinvested.

Four percent isn't a lot of money, on a modest stash. For example, it's $4,000 out of $100,000. That might be enough if you have a pension as well as Social Security. If not, the sooner you figure that out, the better. While you're still working, you can focus on "retirement prep" — increasing savings, cutting spending, reducing debt.

If you've recently retired and are taking more than 4 percent, go on red alert. You're risking that your money could run out. Aim to reset your budget so you can take the prudent 4 percent next year, with inflation adjustments in future years.

If you've said "never again" to stocks and hold only fixed-income investments, you'll have to start with less than 4 percent to make your money last, says planner Tom Orecchio of Modera Wealth Management. That probably means you can't retire as early as you hoped or you'll have to cut spending or rustle up some more income.

Every five years or so, run the numbers again. If you're planning for just 20 years of retirement, you might be able to start withdrawing 5 percent plus future adjustments for inflation.

Within the traditional 4 percent rule, there are many different ways of creating a lifelong stream of income. I'll run through three of them to give you some ideas.

1. The total return strategy. You diversify your investments over stocks and bonds, in the usual way. In a year when stocks are up by 4 percent or more, take your entire withdrawal from the stock portion of your investment pot.

If the market rises by less than 4 percent, take some money from stocks and some from bonds. If the market is down for the year, take the entire 4 percent from the bond portion, to give your stocks time to recover. For simplicity, use mutual funds, not individual stocks. My personal planner takes this approach.

Next: The bucket strategy and the income floor. >>

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