It's one of the most daunting financial challenges you'll ever face: ensuring that the savings you've built during your career will support you through retirement. But it doesn't have to be that hard, says personal finance commentator Jane Bryant Quinn. In the following excerpt from her new book, How to Make Your Money Last: The Indispensable Retirement Guide, Quinn lays out a three-step plan for financial security after you leave the working world.
This is the fourth book for Quinn—including the bestselling Making the Most of Your Money NOW. She was a columnist for Newsweek and, as part of the Washington Post Writers Group, syndicated in more than 250 newspapers. She also spent a decade at CBS News, where she appeared on the network's morning show and the CBS Evening News with Dan Rather.
In her latest book, Quinn covers everything baby boomers and their heirs need to know about making a nest egg last: from getting the most out of Social Security to buying yourself a pension. Through it all, Quinn preaches simplicity, which is how she handles her own investments. In this excerpt, Quinn explains how to make your retirement portfolio last three decades or more—and even leave something behind for your family.
That will take figuring out how to manage your savings—and choosing the right investments throughout retirement. Here's how to get started.
Pick the Right Withdrawal Rate
The first thing on the road to retirement security is figuring out the answer to this question: How much can you spend from your nest egg every year without eventually going broke?
We're talking about your portfolio—stocks, bonds, mutual funds, certificates of deposit, and so on. The spending rate is your speed limit. It helps ensure that your money will last as long as you do.
Some retirees manage their spending so well that they can live entirely on whatever income they receive from their pensions and Social Security. Most of us, however, will depend partly on our savings to pay our monthly bills. That's why spending rules are so important, even when you don't follow them to the letter. They save you from accidentally using up too much of your money when you first retire.
The classic spending rate is 4% of your total savings in the first year you retire or start drawing on the money. In each following year, take the same amount plus an increase for inflation. Properly invested (more on that later), your money should last at least 30 years. You can start with 4.5% if your portfolio is well diversified.
Those rules have been the gold standard in financial planning ever since they were developed. They would have carried you through the worst periods the U.S. economy has endured, measured from the mid-1920s. For any period better than "the worst," your money should last longer than three decades.
But what if the next 30 years take a different course? That's a question I've asked myself as my husband and I plan for the day when we won't have paychecks. The projected Quinn budget works on a 4.5% withdrawal rate. We want to spend enough to be able to enjoy ourselves yet not so much that we start to worry.
Again, you have to be "properly invested," and that means you can't be afraid of stocks. The research on 4% (and other withdrawal rates, up to 5.5%) assumes you're keeping half your money in blue-chip stocks and the rest in intermediate-term government bonds (in both cases in the form of mutual funds).
That assumption stops some conservative investors cold. (What, 50% in stocks?) Fortunately, you don't have to go that high. The 4% rule still works with only 35% in stocks. If you don't trust the market at all—and buy only fixed-income investments—your safe withdrawal rate goes down to about 2.5%. You can start with 4.5% if your investments include smaller stocks as well as larger ones.
That said, the "safe" 4% withdrawal rate may indeed be too safe. In 97% of the periods studied, retirees wound up—30 years later—with at least the same amount of money they had when they started. If you're flexible in your spending, you could start with as much as 5.5%.
The problem is that you never know. That's why planners generally advise you to start with 4% or 4.5%, take your annual inflation raises, and see where you stand in 10 years or so. If markets have risen, you can increase the draw.
Discover the Joys of "Bucketing"
Once you've figured out a withdrawal rate you're comfortable with, you need to implement a system to help keep track of your investments and risk levels. I recommend a technique known as "bucketing." It suits the way we think.
The idea is to put your money into different buckets, each one reserved for a specific purpose. There's one for cash, one for fixed income (bond funds), and one for growth (stock funds).
The cash bucket is your safety net. It holds enough to help cover your living expenses for two or three years. That doesn't mean all your expenses—only those that won't be paid from other income. For example, say you need $55,000 a year to live, and you and your spouse jointly get $30,000 in Social Security. Your cash bucket has to cover the $25,000 gap, or $50,000 for two years. You dip into it for bills. As the cash runs down, you take profits from your stocks and bonds and fill that bucket up again.
Jonathan Guyton of Cornerstone Wealth Advisors recommends that you add a "discretionary" bucket. That's for the inevitable "wants" that come along. (This is not an emergency fund. It's for the stuff—say, helping a child or taking a special vacation—you break your budget for.) Fund it with 10% of your investment money. When it's gone, it's gone.
Size Up Your Stock and Bond Buckets
Once you have settled on the amount to keep in the cash bucket, next decide how to split the rest of your money between stocks and bonds.
But first repeat after me: After down or "bear" markets, the broad stock market has always recovered. Individual stocks might not, which is why it's so risky to be a stock picker. But the price of a broad-based, blue-chip mutual fund will go back up.
You had an object lesson in 2007 when the financial system almost collapsed. The average S&P stock lost 50% over 24 months. Investors fled. Had you been in the market at its bottom in 2009, you'd have earned back all of your losses by 2012, and then gained another 42% by mid-2015. Unfortunately, no one rings a bell when prices start up. You just gotta be there.
Of course, how much to hold in stocks is a very personal decision. Financial advisers ask you to consider your "tolerance for risk," but that's a poor place to start. Instead, consider your "capacity for risk."
"Capacity" measures whether you can afford the risks you take. If you're a retiree with a pension, Social Security, a paid-up house, and a multimillion-dollar IRA, you have a high capacity. It won't cripple your lifestyle if you're hit with a temporary stock market loss. But if you're living on Social Security p