Cracking your nest egg

Kiplinger's Personal Finance Magazine, Oct, 1998 by Ronaleen R. Roha

Once you have a target of how much you'll need each year, consider the resources you have. Although social security is likely to be remodeled in the future, current and soon-to-be retirees are still in the catbird's seat (see "Social Security in Flux," Sept.). To find out how much to expect, ask the Social Security Administration for an estimate of your benefits by calling 800-772-1213, or go to the agency's Web site (www.ssa.gov). You'll also need to figure how much you'll get from company pensions you racked up in various jobs over your career.

Can you afford to retire?

Now focus on cash flow--how the money you spend compares with the money you receive. Naturally, cash flow includes pensions, social security benefits, and interest and dividends from savings and investments. But when it comes to your investments, don't only count on interest and dividends to close any gap between your income and expenses.

In a blow to the old precept that says never invade principal, plan to cash out of certain investments over time to add to your spending pool. Why strain to keep the nest egg intact for your heirs if it means struggling through your retirement? The key is how deeply you can dip into assets each year without depleting the pool too quickly.

That's where the table in the box on the facing page comes in. Use it to see how long your money will last, assuming a certain rate of withdrawal and a certain rate of return on your investments. Or to put it another way, see how much of your assets you can spend each year.

As noted in the introduction to the table, you may learn that rather than worrying about how to make your money last, you may be able to enjoy a higher standard of living in retirement than you expect if you have a solid return on your investments. Or you may be in a good position to make gifts during your life or to leave a sizable estate for your heirs.

The right investment mix

Clearly, the more your investments make, the longer your money will last (or the more you can spend each year). And that brings us back to the stock market. You know that history shows that the stock market is the best place to be for the long haul. Don't suddenly forget that lesson in retirement. The companies in the S&P 500 have posted an annualized return of 11% over the past 72 years, about double the return on five-year government bonds and about three times as much as one-year Treasury bills.

Throughout retirement, says financial planner Katz, "you should have a minimum of 50% in stocks--but 60% to 75% is better, especially early on."

Exhaustive research by William Bengen, a financial planner in El Cajon, Cal., suggests that retirees should have between 50% and 75% of their retirement money in a diversified portfolio of large-company stocks or mutual funds. Based on market behavior over the past 70 years, that mix produced the best overall returns. Anyone holding less than 50% or more than 75% in stocks is being "controlled either by fear or greed," he says.

Once you begin tapping the nest egg, Bengen says, you can decrease your initial stock-allocation percentage by one percentage point per year without seriously affecting your ability to withdraw funds over 30 years. If you had 75% in stocks at age 65, then by age 80 you'd be down to 60% in stocks.