If you thought it was hard to grow a nest egg, try living off one in retirement. Portfolios have seen little or no growth. Return assumptions have plummeted. Interest rates are so low you can’t secure decent income. You need to live off your wits to make sure what you’ve got lasts the rest of your life. With that in mind, here are seven ways to stretch your nest egg.
- Withdraw money at a sustainable rate For most retirees, slowly drawing down savings in retirement is a given; it’s the only way they can get by or afford the retirement they had envisioned. Financial planners widely agree that a safe withdrawal rate is 4% of assets each year with an annual bump for inflation. At this pace your money should last 30 years. For best results, some planners recommend holding nothing in your portfolio other than 30-year Treasury Inflation-Protected Securities (though only if they yield above 1.5%).
- Protect yourself from the market You don’t have to take a lot of market risk to secure lifetime income. Consider a “bucket strategy,” where you place all your assets in three separate pools. Each of these pools is designed to provide income for different phases of your retirement. The first bucket is for safety. It should be risk free and fund the first decade of retirement. Do this through an immediate fixed annuity with a 10-year term. Bucket two is for income that will kick in when the first bucket is exhausted. A good risk-free option is a deferred immediate fixed annuity, which pays nothing for 10 years and then begins paying monthly income for life. You might also choose government bonds and the stocks of multinational dividend-paying companies and real estate investment trusts. These have moderate risk. But you won’t be tapping them for 10 years. Bucket three is for higher risk: diversified stocks and bonds. You won’t touch this bucket for 20 years and by then odds are it will have grown substantially.
- Use Immediate Fixed Annuities for basic expenses You want to be sure your basic costs are covered no matter what. An immediate fixed annuity bought through a top-rated insurer remains the single best way to lock up guaranteed income. With interest rates so low, income is expensive to purchase. So don’t over-estimate how much you need. Look hard at your expenses, cut them, and fund only the essentials. Your fun money will have to come from another source.
- Right-size living expenses There are many simple ways to cut your costs: downsize your cable package, sign up for a more affordable cell phone deal, lease a cheaper car. Maybe you no longer need the life insurance you purchased when you had dependents. Increase the deductibles on your car and homeowners policies to lower the premiums. These add up. But the game-changer expense is housing. Downsizing to a small house and a low-cost region can save you thousands of dollars a month.
- Downsize investing expenses Managing your nest egg shouldn’t require a lot of overhead. Simplify your accounts to weed out hidden fees. Consolidate your investments with one firm to qualify for lower commission rates. Don’t pay for more financial-planning advice than you need. A one-time portfolio overhaul at an hourly rate is far cheaper than coughing up 3% of your assets each year for full service you make scant use of. You may also be overpaying for mutual funds. A bond fund expense ratio should be no higher than .75% and you can find lots of good stock fund options limiting the expense ratio to 1% or less. Your best bet may be index funds and exchange-traded funds that have expense ratios under .25%. A simple strategy of staying half with government bonds and half with stock index funds, and rebalancing yearly to maintain your mix, will keep your costs about as low as they can be.
- Use retirement work strategically Most people are too eager to leave the workforce and take Social Security. A recent GAO study found that 73% of Americans start taking their benefits before age 65, which is a shame because the same study concluded that the surest strategy for stretching your nest egg is to work longer and delay Social Security benefits until age 70, when your benefits will be higher. Consider staying at your career a few extra years. This can be worth many thousands of dollars over the course of your retirement years. The same is true if you scale back to part-time work, earning just enough to meet your expenses and avoid immediately tapping retirement assets and Social Security. If you’re already retired and collecting Social Security you can go back to work and earn up to $14,160 annually before triggering any benefits cut.
- Think of a reverse mortgage as your last resort If you own your home outright or have substantial equity in it, you have a financial fallback should all else fail. When you enter into a reverse mortgage you are essentially refinancing and must pay the familiar fees, including the costly origination fee. You could easily be on the hook for $6,000 right out of the box. That money does not come out of your pocket; it is stripped out of your home equity so you don’t feel the pain. But it is a real cost. There are other fees as well, and through this product you are spending the equity you’ve acquired over many years. But you can never be kicked out of your house, no matter how long you live—assuming you stay current on taxes, insurance and repairs—and the bank must continue paying you monthly income for life. You must be at least 62 to apply for a reverse mortgage. Because of the fees most planners advise exhausting all other assets first.