Many Americans do not realize that one of the greatest threats to their financial security in retirement may be
the risk of outliving their money. The first step in tackling longevity risk is to figure out how much you can
realistically afford to withdraw each year from your personal savings and investments.
Next, develop a plan to make the most out of your nest egg. Consider keeping at least 12 months of living
expenses in an interest-bearing savings or money market account. Then, consider diversifying the rest of your
taxable portfolio among different savings and investment options, including those with different maturities to
account for fluctuating interest rates. Dividend-paying stocks may also potentially help boost supplemental
Finally, remember that many people may live 30 or more years in retirement. Therefore, you may need some
stocks to potentially outpace inflation over the years. A qualified financial professional can discuss these and
other strategies that might be appropriate for you.
How long might you live in retirement? Think carefully. Your answer could influence whether you have enough
money for a comfortable retirement or just scrape by.
According to pension mortality tables, at least one member of a 65-year-old couple has a 72% chance of living
to age 85 and a 45% chance of living to age 901. This suggests that many of us will need to plan carefully to
ensure that we don't outlast our assets.
Live Long and Prosper:
The first step in tackling longevity risk is to figure out how much you can realistically afford to withdraw each
year from your personal savings and investments. You can tap the expertise of a qualified financial
professional to assist you with this task. Or, you can use an online calculator to help you estimate how long
your money might last.
One strategy is to withdraw a conservative 4% to 5% of your principal each year. However, your annual
withdrawal amount will depend on a number of factors, including the overall amount of your retirement pot,
your estimated length of retirement, annual market conditions and inflation rate, and your financial goals. For
example, do you wish to spend down all of your assets or pass along part of your wealth to family or a charity?
Protecting Your Retirement Paycheck:
No matter what your goals, there are ways to potentially make the most out of your nest egg. The remainder
of this article examines how a strategy might play out with assets held in taxable accounts.
First, you'll likely need ready access to a cash reserve to help pay for daily expenditures. A common rule of
thumb is to keep at least 12 months of living expenses in an interest-bearing savings account, though your
needs may vary.
Then, consider refilling your cash reserve bucket on an annual basis by selectively liquidating different longer
term investments, timing gains and losses to offset one another whenever possible.
Developing a Diverse Income Strategy:
Responding to the current interest rate environment is one way to potentially squeeze more income from
your savings and stretch out the money you've accumulated for retirement. For example, if rates are trending
upward, you might consider keeping more money in short-term certificates of deposit (CDs)2 . The opposite
strategy may be employed when rates appear to be declining.
Most retirees need their investments to generate income. Bonds may help fill this need. "Laddering" of bonds
can potentially create a steady income stream while helping reduce long-term interest exposure (see
Building a Bond Ladder
Laddering bonds is a popular strategy used by income investors. This
strategy involves buying an assortment of bonds of different maturities and
staggering the maturities over time. In the above example, an investor
initially buys bonds with maturities of one, two, and three years. As each
bond matures, it is reinvested in another three-year bond to retain the
staggered bond ladder. Total yield (income) is potentially higher than if
continually reinvested in one-year maturities. Risk is also potentially reduced
due to investing in a mix of maturity rates
A common way to help temper investment risk is to spread it out by diversifying among different types of
securities. A retiree seeking income can use the same strategy by adding dividend-paying equities to his or her
portfolio. But be aware that diversification does not ensure a profit or protect against losses in a declining
These stocks potentially offer the opportunity for supplemental income by paying part of their earnings to
shareholders on a regular basis. Another potential attraction? Qualified stock dividends are currently taxed at
a maximum rate of 20%, rather than ordinary federal income tax rates, which currently run as high as 37%.
Also, keep in mind that investing in an equity-income mutual fund, which generally holds many dividend paying
stocks, may help reduce risk compared with investing in a handful of individual stocks.
Adding Annuities to the Mix:
One way to potentially provide regular income and address longevity risk is to purchase an immediate annuity.
In exchange for giving an insurer a specific amount of money, you're guaranteed income for either a specific
period of time, or life. Keep in mind, however, that guarantees are backed by the claims-paying ability of the
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One tactic might be to figure out your annual expenses and determine how much income you'll receive from
Social Security and pensions (if any). Then, consider purchasing an annuity that will make up any shortfall. This
potentially allows you to cover your regular expenses. Then, you can put your other investments to work
There are many types of annuities, so speak with a financial professional to carefully weigh your options, and
be sure to examine fees and other charges before buying.
Accounting for Growth:
Finally, be cautious about being overly conservative with your investments. Many people may live 30 or more
years in retirement. Therefore, your portfolio may need a boost of stocks to outpace inflation over the years.
These are just a few ideas for developing an adequate income plan during retirement. Consider sitting down
with a qualified financial professional to discuss these and other strategies that might be appropriate for your
About Happiness Wealth Management:
Mike Duffy is the CEO of Happiness Wealth Management in San Carlos, California. He is the author of 5 books
on happiness. He has a TEDx talk. He has guest lectured at Stanford University. He helps people be happier
with their money. If you have over $500,000 in liquid assets and would like to have a free consultation about
investing, please call Mike at 650-413-9435 or email him at email@example.com. Our website
is www.happinesswealthmanagemnet.com. Take control of your wealth and be happier for it! Call or email us
1Source: Society of Actuaries, Risky Business: Living Longer Without Income for Life (2013). More recent data may alter this assessment.
2Certificates of deposit (CDs) are FDIC insured and offer a fixed rate of return if held to maturity.
3An annuity is a long-term tax-deferred investment vehicle designed for retirement purposes and may contain both an investment and an insurance component.
Guarantees are based on the claims-paying of the issuer and do not apply to a variable annuity's separate account or its underlying investments. Withdrawals from
annuities prior to age 59½ are subject to a 10% additional tax. Gains from tax-deferred investments are taxable as ordinary income upon withdrawal. Issuing
companies may also charge surrender charges for some early withdrawals. Neither fixed nor variable annuities are insured by the FDIC, and they are not deposits of
-- or endorsed or guaranteed by -- any bank. Investing in variable annuities involves risk, including loss of principal.
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