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How to: Make your nest egg last a lifetime

By Robert Powell, MarketWatch, Source: MCT News Service

BOSTON _ 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.

Yes, conventional wisdom has proven to be more conventional than wise. And now everyone is trying to figure out the best way to turn a nest egg into an income stream that will last throughout retirement. And that includes AARP, which this week released two tip sheets that "challenge conventional thinking and offer general guidance about how to make the best decision for you and your circumstances."

One of the tip sheets, "Making Your Nest Egg Last a Lifetime," which was written by Anthony Webb of the Center for Retirement Research at Boston College, suggests the following:

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 if not longer, said Janet McCubbin, director of financial security at AARP's Public Policy Institute.

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At the moment, many people claim Social Security _ even though it means a reduced benefit _ at age 62, using the faulty logic that they may not live past the so-called break-even point. The break-even point is the date at which the sum of your reduced early benefits no longer exceeds what you would have drawn with the heftier, delayed benefits. (There are plenty of Wed-based calculators to help you figure your break-even age.)

But such calculators fail to address at least three issues. One, the calculators typically don't address married couples. As is well known, husbands tend to die before their wives. And that means husbands who take a reduced Social Security benefit ultimately reduce their surviving spouses' benefit as well. Two, predicting your life expectancy is nearly an impossible task. And three, creating the largest Social Security benefit is fast becoming a basic component of a sound retirement-income plan.

"Delaying is like buying extra income that lasts a life time," said McCubbin. "For most it's optimal for the husband to wait to collect till at least full retirement."

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You can use the Social Security Administration's calculators to find your normal retirement age and estimate your monthly benefit at this Web site. http://www.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, she said.

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.

Annuities are not without their problems at the moment. Pricing is affected by adverse selection, for instance. But McCubbin said much is going on in the way of product development that could make annuities more widely accepted over the next few years. Such developments include in-service annuities, trial annuities and security-plus annuities, as proposed by the Aspen Institute.

You can use this AARP Web site to figure out your sources of retirement income. http://www.aarp.org/money/

3. Pay down your mortgage.

Many would-be retirees should enter retirement debt-free, owning their home free and clear, according to McCubbin. Unfortunately, many would-be retirees pay little attention to their homes as an integral part of their retirement-income planning process. In fact, 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.

According to AARP, some retirees might also want to consider whether a reverse mortgage is appropriate as well. A reverse mortgage is a complicated and sometimes expensive transaction so it's wise to get a handle on the pros and cons of such products before signing any contracts, AARP said.

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. "When the returns on your investments improve, you can increase your withdrawals. Given the fluctuating nature of this income stream, consider pairing this changing income stream to variable or lifestyle expenses, such as gifts, vacations, etc."

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What's more, AARP suggested that the amount retirees ultimately withdraw should be based on realized returns, not rules of thumb.

It's not easy to make your nest egg last a lifetime and the process is only likely to get harder. But AARP's five suggestions are certainly a step in the right direction.

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