Make Your Retirement Money Last
09/04/2013 10:00 am EST
Jane Bennett Clark, of Kiplinger's Personal Finance, offers several strategies designed to help your investments provide the income you need throughout your retirement years.
Steve Halpern: We're here today with Jane Bennett Clark of Kiplinger's Personal Finance. Thanks for joining us today, Jane.
Jane Bennett Clark: Thanks for having me.
Steve Halpern: You wrote the cover story for the new issue of Kiplinger's; it just hit the newsstands. Your article's called “Making Your Money Last.” I can't think of anything more important to those who are nearing retirement.
Jane Bennett Clark: That is absolutely true. Considering today's life expectancy, you could easily live another 25 to 30 years after you retire, so it's up to you to save as much as you can, and to figure out how to make your savings last over several decades.
Steve Halpern: Well, while many investors who are beginning to focus on retirement are thinking about fixed income investing, you say that the number one role, to make your money last through retirement, is to not dump stocks. Could you expand on that?
Jane Bennett Clark: Absolutely. You know, with longer life expectancies, again, you'll need to generate some growth in order to keep up with, and beat, inflation over many years; otherwise you'll actually lose buying power as you age.
The general guideline is to keep about 60% in stocks and 40% in fixed income investments at the beginning of your retirement.
Then, if you're on the conservative side, you might go with, maybe, 30% in stocks and 70% in fixed income, or if you're more aggressive, you might reverse the mix to 70/30. You don't want to get out of stocks altogether.
Steve Halpern: And how do those investing guidelines change as one gets older and moves further down the road into their retirement years?
Jane Bennett Clark: Sure, you know, you want to gradually adjust the mix, so that it becomes more conservative as you get further into retirement and have less time to recover from a market downturn.
From that 60/40 you might move to maybe 70 or 80% in cash and fixed investments as you age, and 30 or 20% in stocks. Again, very few people get out of stocks altogether. That would be a really conservative strategy.
Steve Halpern: Now, one investment vehicle that you highlight in your article is called Target Date funds. Could you explain what those are and how they should play a role in one's retirement plan?
Jane Bennett Clark: Right. Well, you know, rather than adjust the mix yourself as you head into and through retirement, you can invest in a Target Date fund, which will adjust the mix for you. What it does is, it gradually moves your investments from stocks to bonds and short-term funds as you move through retirement.
One thing you have to be aware of is that Target Date funds have different asset mixes and different timetables for adjusting your investment. You should make sure that you know and understand what you're getting when you choose a Target Date fund.
Steve Halpern: Now, are Target Date Funds a difficult investment, or is that something that somebody could get through any of the major mutual fund companies?
Jane Bennett Clark: Oh, sure, yeah. You can pick them up in any of the major companies, and they are a very common investment.
Steve Halpern: What other strategy should investors consider to make their income last?
Jane Bennett Clark: Well, one sort of classic strategy is to live off the interest and dividends that are generated by your investments and preserve the principal, but with fixed interest rates, you would really need a lot of money to be able to generate enough income to be able to live comfortably.
Another strategy, which is also somewhat time-honored, is to take 4% of your total portfolio in the first year of retirement and increase the amount each year by the rate of inflation.
If the stock market tanks in a particular year, you could take a little less than 4%, or if your investments are doing really well, you could take more. The point is to adjust your withdrawals as circumstances dictate.
Another strategy is to calculate your withdrawals based on the actuarial tables the IRS uses for required minimum distributions, which is something you would have to do anyway from your tax-deferred accounts when you're 70 and a half.
Another strategy is to invest enough money in liquid conservative investments to cover several years' worth of basic costs, and then you can leave the rest invested more aggressively to generate growth. There are a number of ways to do this, but the point is, save as much as you can and then be strategic about how you use that money in retirement.
Steve Halpern: Well, thank you for joining us today. We appreciate your insights.
Jane Bennett Clark: Thanks for having me.