Markets

U.S. open in 21 hrs, 36 mins

DJIA

8,451.19

-128.00

1.49%

NASDAQ

1,649.51

4.39

0.27%

S&P; 500

899.22

-10.70

1.18%

10yr Note

100.969

-0.9062

0.89%

FTSE 100

3,932.06

-381.74

8.85%

Nikkei 225

8,276.43

-881.06

9.62%

Hang Seng

14,796.87

-1,146.37

7.19%

Euro (in USD)

1.34

-0.0196

1.44%

Yen (per USD)

100.74

1.12

1.12%

Oil

77.99

-8.63

9.96%

Gold

859.00

-27.50

3.10%

BUSINESS NEWS

INVESTING

PERSONAL FINANCE AT WALLETPOP

SMALL BUSINESS

Avoid Outliving Your Nest Egg

By SHELLY K. SCHWARTZ, Special to CNBC.com

posted: 3 DAYS 17 HOURS AGO

comments: 14

filed under: Financial Crisis, Investing, Retirement, Retirement Advice

Text SizeAAA

(Oct. 8) - Amid the market melee, you may be starting to question the investment strategy behind your battered portfolio, but before you attempt any knee-jerk moves to mitigate risk, consider the impact an uber conservative investment stance might have on your ability to feather your nest egg.

Indeed, for most Americans the threat of outliving their retirement savings far outweighs any short-term investment risk the bear market dishes out.

More from CNBC.com:

• After Rate Cuts, Investors Already Clamor For More

• Pros And Cons For A Rate Cut

• Cramer: When Will Tech Hit Bottom?

An Ernst & Young study in July concluded that nearly three out of five recent middle-class retirees will outlive their assets if they attempt to maintain their pre-retirement standard of living.

It also found that those seven years away from retirement will have to reduce their standard of living by 37 percent to make their money last.

"I don't think we've really seen the wave of those whose savings are too short even occur yet," says Joseph Birkofer, a certified financial planner and principal with Legacy Asset Management in Houston, Texas.

Falling Short

A variety of factors are driving the savings shortfall, says Dallas Salisbury, president and chief executive of the Employee Benefit Research Institute.

For starters, Americans are living longer than before, meaning those who retire in their early 60s (the traditional age of retirement) could spend 30 years or more living off their savings -- a daunting financial proposition for most.

Meanwhile, health care costs continue to climb, while federal health insurance coverage declines. "When Medicare was in its early years, it paid about 80 percent of a retiree's medical expenses," says Salisbury. "Now, it pays about 50 percent."

Lastly, of course, is the overwhelming lack of financial discipline.

In the absence of guaranteed income (once provided by pension plans), too few savers have had the will power or foresight to fund their own retirement using 401(k)s or IRAs.

So, here are a few tips.

How Much Is Enough?

First and foremost, says Birkofer, determine how much money you'll need to cover retirement.

Start by adding up basic living expenses, such as groceries, gas, mortgage (unless it will be paid off by retirement), utilities, taxes and health and auto insurance premiums.

Next, add up discretionary expenses. (Think cable TV, cell phones, entertainment.)

Finally, add up any guaranteed sources of income you'll have, including Social Security, pensions, and rental income from real estate.

The difference between expenses and income is the amount you'll need to finance with personal savings.

"For someone approaching retirement, visibility of their expenses is the single greatest source of stress relief that I have found -- more so than portfolio allocations," says Birkofer.

Create Income

Another way to reduce stress is to create income streams.

"The smartest thing an individual can do is buy an inflation indexed annuity that covers your basic living expenses," he says. "That way, if I put all my leftover money in the market and it goes down significantly, it doesn't create a crisis."

Make sure your annuity income is enough to cover long-term care insurance premiums. Such coverage helps pay for costly medical care for chronic illnesses, including assisted living.

"One of the biggest mistakes many retirees make is that they buy life insurance, they pay the premiums for 20 years and then when they're 80, when they need their insurance most, they run out of money and can no longer afford the premiums," says Salisbury. "If you have to choose between long-term care insurance and food, you choose food."

Cash Is King

Another way to avoid depleting your nest egg is to maintain cash reserves.

"You should have enough cash on hand to support your lifestyle for two years on your last day of work," says Birkofer, noting it's possible to get by with less.

That includes savings in readily convertible assets such as certificates of deposit (CDs), short-term bonds and cash.

"That way, if you have the misfortune of retiring on the day the Dow loses 700 points you don't have to flush out your 401(k)," says Birkofer.

Above all, don't make the mistake of relying on the outdated rule of thumb, which suggests you'll only need 70 percent of your pre-retirement income for every year you spend in retirement.

That's a recipe for disaster, says Birkofer.

"That might have been true when Dad worked, Mom took care of the house and Dad retired and hung around the house," he says. "But what we have now is a generation of dual income households and they're going to have fun and spend money for the first 10 years of retirement."

Your expenses will decrease over the next few years as you stick closer to home and scale back your spending, but higher medical expenses later in life more than make up for it.

Withdrawing Personality

Once retired, the single biggest factor in making your nest egg last is the amount of money you withdraw from your portfolio every year.

"People believe they can spend far more of their assets than they can actually afford," says Salisbury.

For a 90 percent chance of outliving your savings, he says, keep your withdrawals to no more than 3 or 4 percent a year.

The idea, of course, is to leave your principal largely untouched, spending only the interest earned, plus a little extra to account for inflation.

Invest For Growth

Resist the urge, too, to overweight your portfolio with low-risk bonds during retirement; if your investments fail to keep up with inflation you're losing purchasing power.

Most investors require a significantly better average annual return than fixed-income securities provide, given rising life expectancy rates.

Birkofer says retirees should maintain an asset allocation of 70 percent equities and 30 percent high-quality bonds. "The probability of running out of money goes up with every extra dollar you have in fixed income," he says, adding he favors dividend-paying stocks for their stable income.

Getting By On Less

If you're already a day late and a dollar short, you can always reduce living expenses -- sell your second car, move to a cheaper house or cook more meals at home.

And then, of course, there's the last line of defense -- employment.

If you had planned to retire in the next few years, but now suspect you won't have enough to live on, postpone your retirement.

"Every additional year of work has a huge savings effect because you're waiting that much longer to start spending your retirement money, plus you're adding to your fund with whatever additional money you're able to save," says Salisbury.

If you've already bid farewell to your boss, part-time jobs abound and some provide health care benefits, which means you'll have extra income and lower expenses.

"That's the sensible thing to do and it'll also serve to increase your Social Security benefits -- even if you already started collecting," says Salisbury.

2008-10-08 15:56:20

Must Read?

0 %

0 VOTES

Recent Comments

Post Your Own

1 - 10 of 14

14 comments

I89i 09:58:27 PM Oct 09 2008

Report This!

Never depend on only stock/mutual funds.Rental property purchased 15 years ago does very well these days. $995 in mortgage payments can earn you $3,500 and more per month. And in California, rents just keep going up, no need to worry about inflation. And that's just on one property. And no you don't need to be a wiz, I know a guy with ADD and LD that does pretty good. Plus, it's not the money you make, it's the money you don't spend.Also, I buy most things used. I use them for a few years, then resell them, where's the loss?

Trucking4Crete 09:23:58 AM Oct 09 2008

Report This!

out living your nest egg,. what are they saying, that after a life time of working ,if you have no or very little nest egg, you may as well be dead,or people should plan to die before their nest egg runs out,.

CPROEMER 08:29:22 AM Oct 09 2008

Report This!

AVOID OUT LIVING YOUR NESTEGG ! This caption really caught my eye.Moral of the story here is talk to our leaders in government they will Bail you out. And if they don't, they just past a $700 Billion package that includes MENTAL HEALTH CARE, (this was created for the taxpayer who does not believe in the bailout).

MartinZelayaCht 02:55:42 AM Oct 09 2008

Report This!

zzzz

smartstops 01:32:09 AM Oct 09 2008

Report This!

LEARN from this experience . One should ALWAYS have a Protective Exit Strategy in place for themselves in the market at all times. One that is intelligent and constantly adjusting to market conditions. http://www.smartstops.net

Eggtime 09:55:09 PM Oct 08 2008

Report This!

To Sevile1You are saying 1 million dollars for each of 350 million people is 350,000,000.00 thst is not correct. It really is 350,000,000,000,000.00350,000,000 (350 million)people times 1,000,000.00(1 million dollars) equals350,000,000,000,000.00.700 billion dollars is equal to giving every person in the USA (350 million people)2 thousand dollars. Figure it out on the computer .

SpitfireAvids 09:42:07 PM Oct 08 2008

Report This!

National Suicide CentersThe Gov't pays you a net present value of you Social Securityminus a little vig Then you get shot in the headAt least it's quick and your heirs get something instead of just debt and miserie

Sevile1 09:19:47 PM Oct 08 2008

Report This!

Well, here is an idea. Why not give every American 1 million dollars each. This would be a heck of a lot cheaper than paying those fools at the banks. Think about it for a minute. If we all were to get a million a piece the goverment would tax you at about 35 %. So they would recieve 350,000.00 back for every million they gave out. Also make it so that everybody must use the money to pay off or down there debts. Hmmm seems simple to me. There wouldn't be any more mortgage problems because most of us will have paid off our homes. Also pay off any credit cards and auto payments. Gezz this is to simple..lol Why are we paying BILLIONS when all it would take is 350,000,000.00