You Saved for Retirement: 4 Pressing FAQs Now

It was tough enough to save and invest to fund retirement. But once you retire you're confronted with a new and confounding challenge: How to manage a portfolio through unpredictable markets that will generate enough income to meet retirement costs, which may include long-term care, for an unknowable number of years?

"It's the hardest problem in all of personal finance," says Christine Benz, director of personal finance and retirement planning for the research firm Morningstar.

Luckily, there's growing consensus on research-supported strategies to provide a reasonably worry-free retirement. True, there are debates over important details, such as exactly how much you can safely take from a portfolio each year. But financial advisers tend to agree on top-line answers to four of the most difficult questions facing retirees.

From just $107.88 $24.99 for Kiplinger Personal Finance

Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues

CLICK FOR FREE ISSUE

Sign up for Kiplinger’s Free Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Sign up

How should I organize my retirement portfolio?

One way to turn a portfolio into a regular paycheck: Purchase an annuity, which is an insurance policy that promises to make regular payments. But annuities guaranteed to increase payments with inflation are difficult to find.

To preserve your purchasing power, financial advisers recommend retirees divide their portfolios into three or four "buckets": Cash for short-term needs, safe fixed-income for medium-term expenses and stocks for long-term growth. Anyone not covered by long-term care insurance should consider setting aside a fourth bucket to cover care costs. These buckets don't have to be in separate accounts, but should be managed differently.

The amounts you'll need for the first two buckets depend upon your expenses, says Fritz Gilbert, a retiree who posts about retirement finances on The Retirement Manifesto.

The first step is to estimate your annual expenses in retirement for at least the next decade: Housing, food, health insurance, taxes, transportation and allowances for inflation and occasional big-ticket necessities such as dental emergencies and home and car repairs. To be realistic, Gilbert also suggests budgeting for some discretionaries such as vacations, which can be forgone if times get tough.

Then, determine how much of each year's expenses will be covered by non-portfolio sources such as Social Security, pensions and the like. Subtract the income for each year from the expenses for that year. That's how much you'll need to get from your portfolio.

Gilbert advises setting aside enough cash to cover at least two years' of net expenses. Even though Gilbert keeps his cash in a high-yield savings account, he realizes he is earning much less than he could on a significant chunk of money. "But it's not about return; it's about peace of mind," he says.

For the medium-term bucket, build a bond ladder of Treasury Inflation-Protected Securities, in which each rung covers your net expenses for retirement years three through 10, says Benz. A bond "ladder" is a pool of bonds in which different groups mature each year. TIPS principal is adjusted by the Consumer Price Index. Most also pay a little interest. So you're guaranteed to at least match inflation.

You'll refill each year's cash bucket with the bonds maturing that year, and you'll add a new rung to your bond ladder with proceeds from rebalancing or withdrawals from your third bucket.

The third bucket consists of whatever money remains in your portfolio after you've filled the first two. How you invest it depends on your appetite for risk, your age and hopes for portfolio growth.

For retirees seeking absolute safety, William Bernstein, author of The Four Pillars of Investing, recommends "stop playing when you've won the game." He suggests putting up to 25 years of net expenses in a TIPS ladder. That portfolio won't grow very much, but you'll be sure that you can pay your bills. Anything left over can be allocated to stocks, and, if you like, some alternative investments, to fund dream vacations, bequests, or other nice-to-haves, he says.

For safety-conscious investors hoping for more long-term upside potential, Michael Kitces, head of planning strategy for the Focus Partners wealth advisery firm, suggests a "rising glidepath." New retirees should play it safe and put 70% of their portfolio in bonds during what he calls "the red zone" of early retirement. Stock sales into bear markets can dramatically speed up portfolio depletion, he explains. During your annual rebalancing, and as you spend down your bond portfolio in the early years, allow your overall allocation to equities to rise by two to three percentage points per year until your stock allocation reaches 60%.

A simpler option is to keep a fixed percentage of an overall portfolio in broad low-cost U.S. and international stock index funds, as well as small allocations in commodities or other alternatives to keep the portfolio fully diversified, says Bill Bengen, known for popularizing the 4% safe withdrawal rate rule of thumb, and author of A Richer Retirement. Bengen says an overall allocation to equities of 65% provides long-term inflation protection and supports a reasonably high safe withdrawal rate.

Generally, tax advisers suggest holding assets paying significant interest or dividends, such as TIPS or dividend funds, in tax-advantaged accounts. But broad market index exchange-traded funds are tax-efficient, and the dividend yield on a total U.S. stock fund is just 1.14%. As a result, advisers say that ETFs with low dividend yields can affordably be held in either tax-protected or taxable accounts.

How much can I safely take from my portfolio each year?

To calculate a withdrawal rate that will allow your savings to last your retirement, you first have to estimate how long your retirement will last, notes William Bernstein. Social Security Administration data indicates the average 65-year-old man will live 17-1/2 more years, and a woman will live a little more than 20 years. But most financial advisers and retirement calculators play it safe by assuming you'll need your money to last 30 years, in part because research shows that wealthier Americans live longer.

Next, he says, you must decide your comfort with a risk of depleting your portfolio if the stock market tanks or inflation rages. Are you a safety-conscious Methuselah wanna-be? You might want to take as little as 2.5%. Are you expecting an average life span and at least a moderately healthy economy? You could take as much as 7.4%.

One of the most conservative strategies is to leave the principal alone and spend only dividends and interest. A basic portfolio split evenly between total U.S. stock market and total bond market index funds would generate about 2.5% this year.

Rob Williams, head of Wealth Management Research at Charles Schwab, warns that investors tempted to adjust their portfolios to produce significantly more spendable dividends and interest could take on additional risks such as over-investing in troubled companies, or high-yielding but volatile sectors such as energy.

For those willing to spend principal, Bengen now calculates that a 30-year retirement portfolio made up of 65% equities, 30% bonds and 5% cash can withstand a withdrawal rate of at least 4.7% — up from his old 4% recommendation. He stresses that retirees should withdraw that rate from their portfolio only in their first year.

Each year afterwards, they should withdraw the inflation-adjusted dollar amount of their first withdrawal, not 4.7% of the portfolio. Investors who take the percentage each year risk significantly reducing their incomes since, in most scenarios, the annual withdrawals would not keep up with inflation.

Bengen says that 4.7% would have ensured a fully funded 30-year retirement through the worst bear markets and inflationary periods of the past. Those willing to accept some risk of failure, or who expect average life spans, can take more. A starting withdrawal rate of 7.4% would have fully funded a 20-year retirement in more than 980% of historical periods, Bengen calculates.

Of course, future bear markets or inflationary periods could be worse than those of the past. That's why some researchers are more cautious. For 2025, Morningstar estimated that retirees with portfolios equally divided between stocks and bonds had a 90% chance of fully funding a 30-year retirement if they started out by withdrawing 3.7%, then taking that inflation-adjusted dollar amount going forward.

While there is a chance of running out of money, in most scenarios retirees would end up with more than their starting portfolio in year 31. For those who want a higher guaranteed income and don't care about leaving money to heirs, Morningstar suggested a portfolio consisting solely of a 30-year TIPS ladder. That would generate a starting withdrawal rate of 4.5% as of fall 2025.

Retirees comfortable with variable income can take more than their planned withdrawal during bull markets, as long as they cut withdrawals in bear markets, Benz says. "The fixed-rate withdrawal strategies are built for worst-case scenarios," she explains.

But in real life, spending varies from year to year, she notes. Many retirees tend to splurge on vacations or other activities in the first years of retirement, then settle down and spend less in the middle years, and eventually see higher health care costs in their later years.

"If you are OK with pulling in your belt when the market declines, flexible withdrawals are the best practice" to fund your needs and make your portfolio last, she says.

Which accounts should I draw from?

Advisers generally recommend taking advantage of the tax protections of 401(k)s, traditional IRAs and Roth IRAs. That means spending money from taxable accounts first, then tapping tax-deferred accounts such as 401(k)s and traditional IRAs. Tax-free Roth accounts are generally tapped last.

But Allan Roth, a certified public accountant and certified financial planner based in Colorado Springs, Colorado, notes that required minimum distributions from 401(k)s and traditional IRAs tend to complicate the picture. Roth advises retirees who don't yet have to take RMDs but who can take money out from their tax-deferred accounts and remain in a low tax bracket to do so.

"It's better to pay lower taxes now than higher taxes later," he explains. Generally, he urges clients to hold off on Roth withdrawals as long as possible, in part because they are the best kind of accounts to pass on to heirs.

How can I reduce my anxiety about spending from my portfolio?

Even investors who have banked eight figures fear running out of money, says Jamie Hopkins, chief wealth officer of WSFS Bank of Wilmington, Del. After all, people spend decades saving and managing investments to make their portfolios rise.

"You've always been told that to see the number go down is a bad thing. But then on your retirement date, you're told: 'Just kidding.'"

The first step to allaying anxiety is to get started on a retirement financial plan, he says. If your portfolio can safely generate your net expenses, then Hopkins finds that nervous retirees relax when their portfolio includes a bond ladder (or, in some cases, an annuity) that guarantees their basic costs.

If the portfolio can't fund expenses? "Our advisers don't talk about 'success' or 'failure.' We talk about adapting," he says. Sometimes that means cutting expenses by, say, refinancing a mortgage or paying down credit card debt.

In other cases, retirees have to adapt to a retirement that looks a little different than what they had planned by, for example, downsizing to a lower-cost home. But "humans are very resilient," Hopkins says. "We can do it."

Note: This item first appeared in Kiplinger Retirement Report, our popular monthly periodical that covers key concerns of affluent older Americans who are retired or preparing for retirement. Subscribe for retirement advice that's right on the money.

Related Content

• Will You Outlive Your Money?
• How to Spend Retirement Savings Confidently
• Retirement Income Funds to Keep Cash Flowing In Your Golden Years