6 tips to help make your money last in retirement

Ensuring you don’t outlive your assets is a key concern for pre-retirees and retirees alike. Whether you’re getting ready to retire or already there, here are six tips to help make your money last in retirement.

1. Plan for a long life expectancy

Thanks in part to improved medical care, people are living much longer than they did in the past. As a result, we generally recommend you incorporate expectations for a long life in your retirement strategy. To help you get started, we recommend assuming you live to 91 for men and 93 for women, adjusting as needed for known medical conditions, risk factors and family history. Depending on when you retire, that could mean your money has to last 25 or 30 years.

2. Have a sustainable withdrawal strategy

The 4% rule can serve as a helpful guide as to whether your investment portfolio can sustainably meet your retirement spending goals. According to this rule of thumb, someone who retires in their mid-60s can afford to take 4% from their portfolio their first year of retirement and increase the amount annually by 3% each year, assuming they live for 25 years.

But rules of thumb are based on assumptions, and the more your own situation differs from them, the less relevant the rule of thumb is for you. If you plan to retire early or live longer, for example, you’ll likely need to have a lower starting withdrawal rate to make your money last. If you don’t need to start taking withdrawals until later in life, you may be able to afford a higher withdrawal rate.

Your withdrawal strategy should consider your unique situation — how long you plan to take withdrawals, expectations for inflation, how your assets are invested and how much you want to leave your heirs. That’s why it’s best to work with your financial advisor to run calculations to determine what withdrawal rate makes sense for you.

3. Take an appropriate amount of investment risk

Even if you retire, inflation doesn’t, which has important implications for how your money’s invested. Some people shift most of their money to fixed income and cash in retirement, which we believe is a mistake. To help you meet rising costs in the future, growth investments should remain a part of your investment portfolio.

However, market declines can jeopardize whether your money will last throughout your lifetime, especially those occurring early in retirement. Consequently, as you transition toward retirement, we believe a more balanced allocation between equities and fixed income is important to balance the need to keep up with inflation while being sensitive to market risk.

You’ll also want to make sure your portfolio is positioned to meet your spending needs in retirement. We generally recommend retirees maintain 12 months’ worth of portfolio withdrawals in cash in a separate spending account and another three to five years of portfolio withdrawals in a short-term fixed-income ladder.* Maintaining appropriate cash reserves can help ensure your retirement spending needs are met while allowing your stocks more time to recover following a market decline. Remember, though, that owning too much cash and short-term fixed income also comes with risk, which is that your portfolio doesn’t earn enough to keep up with inflation.

4. Consider an annuity

An annuity can provide a guaranteed income** stream for life, regardless of how the market performs or how long you live. This income, along with your Social Security benefit, can provide a minimum income floor to help cover your fixed costs in retirement and reduce your reliance on your portfolio for income. It's effectively “income insurance.” Of course, like any investment, annuities have trade-offs to consider. For example, annuities are subject to liquidity constraints, their income payments generally don’t increase with inflation, and there’s a cost for the insurance it provides. Your financial advisor can help you understand how an annuity may impact your retirement goals to help you determine whether one makes sense for you.

5. Prepare for curveballs

Risks are unavoidable, but you can prepare for them. One way to prepare is to incorporate risk expectations into your strategy for market volatility, inflation and longevity. We also recommend having at least three to six months of total expenses set aside in an emergency fund in case of unexpected expenses.

For certain risks, it may make sense to insure against them. For example, we recommend having homeowners/renters, auto (if you own a vehicle) and health insurance. We also generally recommend disability and life insurance while still working to help protect against potential loss of income. And as you get ready for retirement, you may want to consider long-term care insurance to help protect your assets if you or your spouse have a long-term care need. Having the appropriate legal documents in place can also help protect you and your family in the event of incapacitation or loss of life.

6. Review regularly and remain flexible

As much as you prepare, a lot can change along the way. That’s why it’s important to review your retirement strategy and portfolio regularly — at least annually and after major life or market events — and adjust as needed. Even small adjustments, like forgoing an increase in your spending following a down market, can meaningfully extend the life of your portfolio.