9 Tips to Help Maximize Your Retirement Nest Egg

Key Points

  • Now that you've built your retirement nest egg, how can you make it last? Switching from being a saver to a spender means having an entirely new approach to money.
  • We'll walk you through nine ways to help maximize your retirement nest egg, plus show you examples of what to do.

Editors' Note: This article is excerpted from The Charles Schwab Guide to Finances After Fifty, available in bookstores nationwide. Read more at http://schwab.com/book.

You've been building and protecting your retirement nest egg for decades. You've been anticipating the day when you could say goodbye to the nine-to-five grind and finally have time for whatever activities or challenges come your way—whether that's working part-time, volunteering, or traveling, or even starting a new business. Whatever your dreams, this is your time. What surprises you, though, what you hadn't anticipated, was how tough this transition would be psychologically—and how vulnerable you would feel.

I've heard variations of this story so many times that I know it isn't necessarily a function of one's wealth. Switching from being a saver to being a spender means having an entirely new approach to your money.

It can be tough regardless of the size of your portfolio. To ease this transition, my colleagues at the Schwab Center for Financial Research have come up with some pretty straightforward guidelines. They aren't intended to be rigid directives. But our experience has shown us that these fundamentals can help reduce your financial stress and support whatever retirement lifestyle you choose.

Also think about consulting an objective financial planner as you transition into retirement. This is one of those times in your life when some professional guidance can go a long way.

No. 1: Review your situation

No matter how much or how little you've saved, make sure you know exactly where you stand. Gather the latest statements from all of your accounts, and create a net worth statement (your assets minus your debts). Then take a look at your cash flow (money in, money out) for the last couple of years, and use this information to create a projection for the future.

Caution: If you want your portfolio to last for 30 years, plan to withdraw no more than 4% of its value in the first year of retirement. After that, you can adjust the amount for inflation.

No. 2: Maintain at least a year of cash

Set aside enough cash to cover at least one year of spending. This is the amount that you'll need in addition to the income you can count on—for example, from Social Security, a pension, or real estate investments. Following are some good places to keep your cash. None will provide a great return, but that's okay. This is about safety and liquidity—not income.

Where to stash your year's worth of cash

Investment

Liquidity

Market Value

Credit Quality

Bank checking and savings accounts (preferably interest-bearing)

Immediate

Stable

FDIC-insured

Money market funds

Generally immediate (may be limits on writing checks)

Generally stable but could fluctuate

Not FDIC-insured

T-bills

At maturity

Fluctuates prior to maturity

Backed by U.S. Treasury

Certificates of deposit (CDs) (perhaps laddered with three-, six-, and nine-month maturities)

Bank CDs may have penalties for early withdrawal

Stable

FDIC-insured

Note: Money market funds are neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund.

No. 3: Consolidate income in a single account

Combine all of your non-portfolio income—which could come from Social Security, a pension, an annuity, whatever—into one account. You can also put portfolio income—for example, interest and dividends—into this account. This account will be your primary source of cash, allowing you to more easily track your income and spending over time.

No. 4: Match your investments to your goals and needs

Select a mix of investments in keeping with your personal goals, time frame, and risk tolerance. For most people, this means gradually moving away from stocks and toward bonds and other fixed income, as well as cash. But it's important not to abandon stocks altogether, since they can help your portfolio keep up with inflation.

Bonds not only will provide you with income, but also will act as a buffer against market volatility. Cash investments protect you from having to sell your stocks or bonds at a bad time.

For example, you might follow the following path:

 

Pre-retirement

Early Retirement

Late Retirement

Portfolio

Moderate

Moderately conservative

Conservative

Percentage of stocks, fixed income, and cash

60% stocks
35% fixed income
5% cash

40% stocks
50% fixed income
10% cash

20% stocks
50% fixed income
30% cash

Creating a Ladder

No. 5: Cover essentials with predictable income

We recommend that you review your income and expenses, and then divide your expenses according to whether they're essential or discretionary. Ideally, you'll be able to cover all of your essentials with predictable income. That way, you can cut back on nonessentials in a lean year.

Predictable and Fluctuating Income

Note: Annuity guarantees are subject to the financial strength and claims-paying ability of the issuing insurance company.

No. 6: Don't be afraid to tap into your principal

It's the rare individual whose portfolio is large enough to live off dividends and interest alone. Your goal isn't to avoid tapping into your principal at all, but to do it in a prudent way. Follow the 4% guideline: In essence, you can withdraw up to 4% of your portfolio's value each year, increasing with inflation, and have 90% certainty that it will last for 30 years—provided that you are invested in a well-diversified portfolio with at least 40% stocks.

Smart Move: If you have mutual funds in taxable accounts, consider having the distributions automatically swept into a money market fund. You may not have to sell as many shares that way.

No. 7: Follow a smart portfolio drawdown strategy

When it comes to creating your retirement "paycheck," tax-efficiency is king.

Here's the gist:

  1. First draw down your principal from maturing bonds and CDs.
  2. Then, if you're 70½ or older, take your required minimum distribution from your IRAs or other tax-deferred accounts, focusing on overweighted and lower-rated assets.
  3. Next sell overweighted and lower- rated assets in your taxable accounts.
  4. And finally sell overweighted and lower-rated assets in your tax-deferred accounts. Sell from your traditional IRA before you move on to your Roth IRA.

The rationale behind this order is that withdrawals from traditional IRAs and 401(k)s are taxed as ordinary income, typically at a higher rate than the long-term capital gains rate that you'd pay when you sell investments held for more than one year from your taxable accounts. Also, leaving more money in your IRA or 401(k) provides more time for tax-deferred compound growth.

No. 8: Rebalance to stay aligned with your goals

It's important to review your portfolio's asset allocation at least annually. If one asset class has grown beyond your plan, it's time to pare it back. Once you're retired, this can be a prime opportunity to sell assets to generate cash.

Example: Let's say that your target asset allocation is 40% stocks and 60% bonds, but your portfolio has drifted to 45% stocks and 55% bonds. You can sell some stocks to generate income, and reallocate anything that's left over to bonds until you're back on target.

No. 9: Stay flexible and reevaluate as needed

Life doesn't just stop changing once you're retired. Let's say you want to sell your house and travel the world. Perhaps you've received an inheritance. Or maybe you're starting a business or going back to work. As your needs change or your feelings about risk change, your portfolio and the amount you withdraw should reflect your new realities.

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