Making Your Money Last

Return Your Retirement Plan to Solid Footing

In the midst of retirement and feel like your plan has gone off the rails? Here's how to get back on track.

You've cruised through years of retirement, keeping spending in check and maintaining a balanced portfolio. But every now and then you hear a thud. Is it just a speed bump or a warning of a breakdown ahead?

Many retirees felt the road get a little rougher this year. The era of ultra-low interest rates dragged on through its seventh year, leaving retirees wondering if they’ll ever again earn decent yields on their cash. The third quarter stock-market stumble was a reminder of how quickly a stock-heavy portfolio can head south. And there will be no cost-of-living adjustment for Social Security benefits for 2016, even as many retirees see sharp increases in out-of-pocket health care costs and other essential expenses.

Whether you are feeling a tad anxious about outliving your assets or are still fully confident that your plan is running smoothly, it may be time for a mid-retirement tune-up. At least once a year, retirees should reassess their overall portfolio, spending patterns and life expectancy. Ask yourself, “are you in a good position to continue to spend what you’ve been spending, or is it time to start adjusting?” says Judith Ward, senior financial planner at T. Rowe Price.

For people in mid-retirement, making any needed adjustments can be a thorny issue. Working longer, which can boost retirement security, may not be an option for many older retirees. And retirees in their seventies and older have missed their chance to increase their guaranteed income by delaying Social Security benefits. Cutting spending may not be so simple, either. People in mid-retirement often spend less on travel, restaurant meals and clothing than they did in their early retirement years, so there are fewer obvious frills to trim.

But older retirees still have plenty of options for improving the odds that their money will last a lifetime. Those options include changing the portfolio drawdown strategy, buying a single-premium immediate annuity to cover essential expenses or moving to less-expensive housing.

Are you really off track? To find out whether your plan is on track, first reassess your life expectancy. The older you get, the longer you're likely to live. And your health status may have changed since you retired. Detailed online calculators such as the one at help you estimate your life expectancy based on your lifestyle, eating habits and medical history.

Once you have a good sense of your remaining life expectancy, there's a simple and reliable way to gauge whether you're spending from your portfolio at an unsustainable rate, says David Blanchett, head of retirement research at Morningstar Investment Management. If you divide one by your remaining life expectancy, you'll get an estimate of a safe withdrawal rate -- one that gives your portfolio good odds of lasting a lifetime. If you expect to live another 20 years, for example, a reasonable withdrawal rate is 5%. And if you've spent more than 5% of your portfolio in the past year, "you could be on the wrong track," Blanchett says.

If you've exceeded your safe withdrawal rate in one year because of big expenses that aren't likely to recur -- such as putting a new roof on your house -- there's probably no reason to panic. But if your annual portfolio withdrawals exceed the percentage year after year, it's time to look at ways to rein in spending and boost your income.

Adjust your drawdown strategy. For years, retirement experts touted the "4% rule," in which retirees spent 4% of their portfolio balance in the first year of retirement, adjusting for inflation in subsequent years. But when you spend a steady dollar amount from a portfolio that's fluctuating in value, you sell more shares when your investments are down and fewer shares when they're up, potentially depleting your portfolio faster than necessary. "In some sense, the 4% rule is the strategy that creates the most sequence risk" -- the risk that dismal markets in earlier retirement years set up your portfolio for failure in later years, says Wade Pfau, professor of retirement income at the American College of Financial Services, in Bryn Mawr, Pa.

You may want to consider a more flexible approach. A spending strategy that responds to your portfolio's performance can boost the chances that your money will last a lifetime. There are a number of these "dynamic" drawdown strategies to choose from (read Make Your Retirement Savings Last a Lifetime). But a strategy based on the safe withdrawal rate that Blanchett described earlier is a good place to start. Each year, simply multiply your year-end portfolio balance by one over your remaining life expectancy to arrive at your annual spending amount.

This is the same basic method that the IRS uses to calculate required minimum distributions from traditional IRAs and 401(k)s. A study by researchers at the Center for Retirement Research at Boston College and China's Renmin University found that spending based on the RMD rules outperforms alternatives such as the 4% rule. You can recalculate your life expectancy each year or use the life expectancy factor listed for your age in IRS Publication 590-B, Distributions from Individual Retirement Accounts.

Drawing down assets tax-efficiently can also prolong the life of your portfolio. The conventional wisdom tells retirees to draw down their taxable accounts first, followed by tax-deferred 401(k)s and traditional IRAs, leaving tax-free Roth accounts for last. You may want to tweak that approach. Since withdrawals from tax-deferred accounts are taxed as ordinary income, you should draw money from those accounts in years when the withdrawals will be taxed at an unusually low rate, says William Reichenstein, finance professor at Baylor University.

If you are generally in the 25% income tax bracket, for example, you might draw just enough money from your tax-deferred retirement account each year to get to the top of the 15% bracket. Take any additional spending money you need from taxable accounts first, if you still have them, or from Roth accounts.

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Years when your taxable income is unusually low give you opportunities to draw larger amounts from tax-deferred accounts. Those opportunities may occur in years before required minimum distributions begin -- a window that has closed for older retirees. But they can also occur in years when you have high tax-deductible medical expenses, which typically come late in life, Reichenstein says. If you follow the more tax-efficient strategy, you'll still have some money left in tax-deferred accounts, and you can draw those funds out at a very low tax rate in a year when you're paying, say, $80,000 in nursing-home bills. "Just using the tax code gives you another couple of years" of portfolio longevity, Reichenstein says.

Look homeward. For retirees of all ages, home-related costs are by far the largest spending category. Mortgage or rent payments, utilities, property taxes, repairs and other housing expenses account for more than 40% of retirees' spending, according to the Employee Benefit Research Institute.

Your house may also be a large repository of wealth -- with the size of your home equity perhaps surpassing your financial assets. So if your retirement-spending plan has run off the rails, your house may offer the fastest way to get back on track. Downsizing to a less-expensive home can help you in two ways: The difference in home prices will add to your savings, while lower utility bills, property taxes and other housing-related costs will slash your monthly spending.

If you're thinking of moving to a cheaper home, the calculator at helps you estimate moving costs as well as how much the move could boost your income and reduce your monthly spending. A person selling a $500,000 home and buying a $250,000 home, for example, might face moving costs of $50,000, but she would also have an extra $200,000 in savings that she could invest for income, and her monthly expenses would drop about $1,275, according to the calculator.

Donna Tschetter, a retired newspaper advertising salesperson who lives outside Saratoga Springs, N.Y., has been surprised at how little she spends since downsizing two years ago. She previously lived in a three-bedroom house with cathedral ceilings, where "the heat goes right up" into the ceiling, she says. Now that she has moved to a "cozy" apartment, she says, her gas and electricity bills are far lower, and her Social Security benefits can cover her rent and utilities, with a little left over. What's more, "I don't miss the care and upkeep" of the house, says Tschetter, 65.

Those willing to move to another city may save even more. The Economic Policy Institute's family budget calculator ( lets you compare the cost of essentials such as housing and transportation in various cities. Compare how states tax retirement income and Social Security using Kiplinger's Retiree Tax Map.

If you're committed to remaining in your current home, you might consider a reverse mortgage on your house. You can take the loan proceeds as a lump sum, regular monthly payments or a line of credit. The loan must be repaid when you move out for more than 12 months, sell your house or die.

With today's low rates and relatively high home values, "you can get a lot of money out on a reverse mortgage," says Anthony Webb, senior research economist at the Center for Retirement Research. But those amounts could shrink significantly if home prices fall and interest rates rise, "so if you're interested, there's an argument in favor of doing it now," he says.

The line of credit option is your best bet if you don't need cash immediately. Since the credit line is a readily available source of cash, it can help minimize the amount of cash you keep in your portfolio -- to perhaps six months' worth of living expenses. If you need money at a time when your portfolio value has plunged, you can tap into the credit line rather than selling investments at depressed prices. And the untapped balance of the credit line will grow at the same interest rate that's charged on the proceeds you use.

This reverse mortgage strategy lets you avoid the performance drag that comes with a large cash allocation. And it can boost the odds your portfolio will last a lifetime.

Consider a retiree who at age 62 has a $500,000 portfolio composed of 60% stocks and 40% bonds and a $250,000 home value. He has a cash bucket holding six months' worth of living expenses, which he refills periodically by selling investments. If he needs to spend 5% from his portfolio to cover living expenses in the first year of retirement, adjusting that dollar amount for inflation each year thereafter, he has just a 52% chance that his money will last 30 years, according to a study by researchers at Texas Tech University and financial advisory firm Evensky & Katz. If he taps into a reverse mortgage line of credit to refill his cash bucket when his portfolio is down, however, the retiree can boost the odds to 82% that his money will last 30 years, the study found.

With this strategy, the reverse mortgage line of credit is sort of like insurance -- because "ideally, we'll never use it," says John Salter, associate professor of personal financial planning at Texas Tech and co-author of the study.

Get a guarantee. As you get older, investment returns matter less and the question of how long you'll live matters more and more. Henry "Bud" Hebeler, 82, who retired as a Boeing executive at age 55 and now runs the retirement-planning Web site, reviews his own retirement plan every year. "When you're 40 or 50, you're looking ahead and the analysis doesn't change much whether you think you'll be in retirement for 20 or 25 years," Hebeler says. "But when you're in your eighties, it makes a big, big difference." Hebeler has addressed this longevity risk in his own portfolio by buying immediate annuities.

As you get further into retirement, "putting some portion of assets into an income annuity looks increasingly attractive," Pfau says. The older you are when you buy an immediate annuity, the higher the payout, because the insurer has fewer years to make payments based on average life expectancy. For example, a 75-year-old man who invests $50,000 in an immediate annuity will get $4,632 per year for life, compared with just $3,336 for a 65-year-old man investing the same amount, according to The payouts you can get from an immediate annuity "are going to be higher than any sort of conservative spending rate" that you could draw from your portfolio, Pfau says.

Older retirees looking for guaranteed income should consider pulling some money from their bond holdings to buy an immediate annuity, Pfau says. The reason: If you need to draw money from your portfolio when interest rates rise, bond funds may have to be sold at a loss. Moreover, if you need to spend from your portfolio at a rate that's higher than today's rock-bottom interest rates can support, a bond-heavy portfolio is a recipe for failure. If you're spending at a 5% inflation-adjusted rate from a bond portfolio that earns a 0% after-inflation return, you'll run out of money in 20 years. "When interest rates are low, it makes the annuity more attractive relative to bonds," he says.

To determine how much to annuitize, add up your essential expenses, then subtract your Social Security, pensions and any other guaranteed income. Aim to cover the spending gap with the annuity. Go to and enter your age and gender to determine how much you'll need to invest to get that guaranteed income.

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