There are two approaches to planning your spending in retirement: Do it yourself or go with a pro. Getty Images By Eleanor Laise, Senior Editor April 1, 2019From Kiplinger's Retirement Report You've spent decades building your nest egg. Now you need to tap your investment portfolio in a tax-efficient way that covers your expenses while minimizing the risk you’ll run out of money. So how exactly do you do that? SEE ALSO: 11 Strategies for IRA Withdrawals in Retirement William Selden, a retired management consultant in Fort Lauderdale, Fla., has done his homework on this head-scratcher. “I literally have a five-foot high stack of papers I’ve printed off and read,” says Selden, 60. On top of studying all the academic literature, he has calculated a “safe” spending rate for his portfolio and built his own models to forecast how long his money can last. There’s just one problem: The academic research “doesn’t match my personal experience,” he says. Some studies, for example, assume a constant rate of spending in retirement, whereas “my spend rate is all over the place. It’s lumpy,” says Selden, who retired in 2009. This year, he says, his daughter is graduating college and may go on to graduate school—tacking on an extra $20,000 to $40,000 that he hadn’t planned to spend. Then there’s the issue of the retirement time horizon. Many studies assume retirement starts at age 65 and ends 30 years later. That’s not much help to people like Selden, who left work at age 50 and believes his retirement could last 50 years. Given the vagaries of retirement spending and life expectancies, “the uncertainties compound,” Selden says. “It’s an almost unsolvable problem.” Advertisement Making Your Retirement Nest Egg Last a Lifetime Let’s get real about “decumulation”—the process of spending down your nest egg in retirement. While it’s tempting to rely on simple rules of thumb and “safe” spending rates, they don’t address all of the unknowns: How long will you live? What unexpected expenses will you face? How will market performance, inflation and tax rates change in the future? Getting retirement spending right is actually “like trying to hit a moving target in the wind,” says Jamie Hopkins, director of retirement research at Carson Group. Any reasonable strategy, he says, will “require you to make some changes over time.” SEE ALSO: 9 Smart Strategies for Handling RMDs Deciding how much to pull from your portfolio each year is just one part of the equation. With each withdrawal, you’ll also need to decide which accounts to tap—taxable, tax-deferred or Roth—to minimize your tax bill. And you must weave those portfolio “paychecks” together with your other retirement income sources such as Social Security, pensions and annuities. The stakes are high. Get the math right, and you could extend your portfolio’s life by many years. Get it wrong, and you could be forced to make painful spending cuts later in retirement. If you don’t want to go it alone, the financial-services industry would love to sell you a solution. Financial firms in recent years have launched a slew of new decumulation tools, ranging from “managed payout funds” meant to deliver steady retirement paychecks to sophisticated online software and advisory services that include customized drawdown plans. These tools have their limitations. Largely, the digital advice is “self help,” says Tom Baker, a University of Pennsylvania law professor who has studied robo-advisers’ drawdown tools. Rather than sizing up annuity options that could trim your risk of outliving your money, for example, their main business is helping you make the most of what you already have. Advertisement When you understand these tools’ strengths and weaknesses, however, you may find they can simplify at least a piece of your drawdown strategy. Below, we look at two paths to a retirement paycheck: One for retirees who want professional advice and one for do-it-yourselfers. Route 1: Let a Pro Design a Retirement Drawdown Strategy for Me If you want professional help, you can go the traditional route and work face-to-face with a human adviser, or sign up with one of the online advice providers. No matter which route you choose, you’re likely to end up with a blend of human and digital advice. Unless a human adviser is relying on simple rules of thumb, he may well devise your drawdown strategy with the aid of automated tools similar to those that online advisers offer directly to consumers. Most of the online services providing drawdown guidance, meanwhile, also offer access to human advisers. Firms rolling out new drawdown services in recent years include United Income and Personal Capital , which charge asset-based fees, and Income Strategy , which charges a flat monthly fee for software subscriptions or an asset-based fee for an advice package. Some established robo-advisers such as Vanguard Personal Advisor Services also offer drawdown strategies. Can such services deliver on their promises of personalized, tax-efficient drawdown strategies? Ask these key questions when shopping for drawdown advice: Will you help me maximize my guaranteed income streams? When your essential living expenses are covered by guaranteed income from Social Security, pensions, annuities and other sources, there’s a lot less pressure to find the perfect portfolio drawdown strategy. Advertisement Firms such as Vanguard, United Income and Personal Capital all say they’ll help clients optimize their Social Security claiming strategy. At Income Strategy, monthly subscribers who want help finding the optimal Social Security strategy pay a separate fee for that service, says chief executive officer William Meyer. Income Strategy’s sister company, Social Security Solutions, offers personalized claiming strategies starting at about $20. For retirees whose Social Security and other guaranteed income doesn’t cover their essential expenses, many advisers recommend a plain-vanilla annuity to fill the gap. (Read “Keys to Lock In Lifetime Income” from our December issue.) But the online drawdown services generally aren’t focused on this piece of the puzzle. “We don’t lead with annuities,” says Colleen Jaconetti, senior investment analyst in Vanguard’s Investment Strategy Group, although advisers can discuss annuities with clients who are interested. Likewise, United Income generally doesn’t recommend annuities, but it will help assess an annuity purchase for clients in its “full service” tier, which requires a $300,000 minimum investment. SEE ALSO: How 11 Types of Retirement Income Get Taxed How will you estimate my retirement spending? Some retirees want to be told how much they can spend each year. Others have a good idea how much they want to spend throughout retirement and are just looking for a tax-efficient plan that will make that happen. People in the first camp may particularly like United Income’s approach. The company uses “big data” to project a client’s spending based on demographic, health and other factors. Clients can then customize those estimates as much as they like and add specific spending goals, says Lara Langdon, vice president of research and algorithm development. Advertisement At Income Strategy, meanwhile, clients enter their own spending patterns and then see a projection of how long their money will last, Meyer says. Clients can fiddle with their spending estimates, perhaps adding income from a part-time job or cutting discretionary spending, until they arrive at a satisfactory outcome. Are you focused on tax efficiency? All of the drawdown services aim to be tax-efficient—but some take that concept further than others. Income Strategy, for example, doesn’t just tell you whether you should pull your next dollar of spending from a taxable, tax-deferred or Roth account. It tells you exactly which holdings to sell and aims for a withdrawal sequence that will minimize Medicare income-related surcharges and taxes on Social Security benefits. It will also recommend Roth IRA conversions when they provide tax-saving opportunities. Other firms don’t get so granular. Vanguard, for example, won’t recommend that you sell specific holdings that are held in outside accounts, Jaconetti says, and it doesn’t proactively recommend Roth conversions, although that’s something advisers can discuss. How much does it cost? Although many investors associate online advice with low fees, these drawdown services don’t always come cheap. United Income charges 0.5% for its “self service” tier and 0.8% on the first $500,000 invested in its full-service tier. Personal Capital charges 0.89% on assets up to $1 million. That’s just a hair below the 1% that many investors pay to work with a human adviser face-to-face. Cheaper options include Vanguard, which charges 0.3% on assets up to $5 million. Or you can pay flat monthly fees at Income Strategy, ranging from $20 for a basic subscription to $50 for a “premier” subscription that includes access to low-cost exchange-traded fund model portfolios and other features. When sizing up prices, consider whether your fees buy you access to a human adviser. The services typically offer access to a team of advisers but may provide dedicated advisers if you meet certain investment minimums—for example, $200,000 at Personal Capital or $500,000 at Vanguard. Income Strategy, however, charges monthly subscribers $125 an hour to talk with a retirement-income expert. Route 2: I’ll Figure Out a Retirement Drawdown Strategy Myself If it’s so hard for the pros to get retirement spending right, do individual investors stand a chance? Well, yes, researchers say. Depending on the complexity of your finances and your willingness to make adjustments along the way, a do-it-yourself strategy may be a simple—and low-cost—solution. One promising approach is the “Spend Safely in Retirement” strategy developed by the Stanford Center on Longevity and the Society of Actuaries. The best way to use this approach, researchers say, is to work enough to cover your living expenses until age 70, then claim Social Security and use the RMD rules to draw down your portfolio. Divide your total portfolio balance by the factor listed for your age in Table III of IRS Publication 590-B to calculate your annual withdrawal. “The RMD approach tends to work well because it is readjusting based on life expectancy each and every year,” Hopkins says. What’s more, this strategy adjusts spending in response to investment performance, because each year’s withdrawal is a percentage of the prior year-end portfolio balance. That approach is “safer, and allows you in many outcomes to increase spending over time as your portfolio grows,” says Mike Piper, who writes the Oblivious Investor blog. SEE ALSO: 31 Kirkland Products Retirees Should Buy at Costco When it comes to the most tax-efficient way to tap your accounts, the conventional wisdom is to draw from taxable accounts first, then tax-deferred, keeping Roth accounts for last. But a different approach will work better for most middle-income retirees, Meyer says. If you retire at 65 and plan to delay Social Security until age 70, he says, consider tapping tax-deferred accounts first. By drawing on those 401(k)s and IRAs, you whittle down the taxable RMDs that kick in after age 70½—which can in turn minimize taxes on your Social Security benefits.