Back in the good old days, before the crisis of 2008-09, many experts suggested that all you needed to do was withdraw 4 percent per year, adjusted for inflation, from your nest egg. That strategy, experts said, was a near-guarantee that your nest egg would last a lifetime.
Well, go tell that to the guy selling apples and pencils on the street corner. Now everyone is trying to figure out the best way to turn a nest egg into an income stream that will last throughout retirement. Here's some advice:
1. Delay claiming Social Security: Retirees and would-be retirees need to consider matching their fixed and best-case, inflation-adjusted sources of income against their fixed expenses. And one way to create the best inflation-adjusted source of income at the moment is to delay taking Social Security for as long as possible, certainly at least until your full retirement age, said Janet McCubbin, director of financial security at the AARP. You can use the Social Security Administration's calculators to find your normal retirement age and estimate your monthly benefit: ssa.gov/planners/calculators.htm
2. Consider purchasing an annuity: It's not right for everyone, said McCubbin. But for those who are retiring with a large nest egg and who don't have enough fixed and guaranteed sources of income to match their fixed expenses, an annuity might fit the bill. In essence, you want a fixed and dependable stream of income that covers your basic living expenses. According to AARP, an annuity would not, however, be appropriate for someone with little in savings or someone with a large share of preretirement income already replaced by Social Security or by a traditional pension plan. You can figure out your sources of retirement income at aarp.org/money/.
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3. Pay down your mortgage: Many would-be retirees should enter retirement debt-free, owning their home free and clear, McCubbin said. Unfortunately, many would-be retirees pay little attention to their homes as an integral part of their retirement-income planning. Most people age in place until they become sick or a spouse dies and then they decide to sell their home, according to AARP. Instead, homeowners should analyze far in advance their living arrangements and whether they want to have a mortgage in retirement. Some retirees might also want to consider whether a reverse mortgage is appropriate as well.
4. Allocate your assets wisely: Many retirees place large portions of their nest eggs in investments that provide a guaranteed return on capital. According to conventional wisdom, retirees should rebalance their nest eggs in favor of bonds as they age. But AARP's view is that retirees should build portfolios that are broadly diversified and based on one's tolerance for risk.
5. Withdraw funds carefully: And that brings us back to the place we began. Conventional wisdom suggests that you should withdraw no more than 4 percent of your savings during retirement. But now, at least according to AARP, retirees need to be a bit more thoughtful and flexible about this. "In tough economic times, you may want to withdraw a smaller percentage of your savings, if possible," AARP said.