How to Make Your Money Last in Retirement

To better understand how much savings you'll need to live comfortably in retirement, you should estimate what your expenses will be, tally your sources of likely income outside of savings (like Social Security, a pension, or an annuity), and then determine how much you'll need to withdraw from your portfolio given your life expectancy. Remember, these numbers are not static but rather are a starting point. You should check back regularly to update your projections, particularly if you've experienced a big life change.

During their working years, most investors focus mainly on investment growth. That's great if you have a far-off retirement date. But when you're close to retiring or in retirement, it's time to think of your investments differently, with an eye toward distribution. There are many ways to invest, depending on your goals. To create reliable, predictable income, many investors use a mix of investment and income strategies. It's important to determine the right mix of investments for your needs and goals.  

It's typically a good idea to have sufficient cash on hand to cover your immediate annual living expenses. Next, consider setting aside two to four years of living expenses in relatively liquid accounts (think money market funds and CDs) to tide you over in case of bad market years. The rest of your savings can be invested in a mixture of stocks, bonds, and cash investments that balance the need for income and growth—a combination that accounts for other income sources and shifts over time as you get closer to withdrawing your savings.

How you withdraw your retirement savings is as important as how you invest them. Since not all investments are subject to the same tax treatment, the order in which you tap them could provide a meaningful boost to your retirement income. Make sure you speak with your tax advisor about your specific circumstances.

When you're ready to implement your retirement income plan, you have options. The right way to do it will depend on how much time you have and how involved you want to be in the process. Here are three common approaches many retirement savers take:

• Self-directed. If you like to manage your investments yourself, you can start by using a retirement calculator to determine how much you can withdraw each year of retirement based on factors such as your current age, target retirement age, comfort with risk, current savings, and additional sources of cash flow.  
  
  In subsequent years of retirement, you may need to adjust your level of income depending on how those factors change. For instance, if your investment assets had better-than-expected returns or you pulled in additional income, you might decide to withdraw more than you did the previous year. Alternatively, you can dial back withdrawals if market conditions hit your portfolio harder than expected or a surprise cost necessitated a bigger-than-usual withdrawal.  
  
  Of course, this approach puts the onus entirely on you to keep up with your finances, rerun your calculations at regular intervals, make the necessary adjustments, and decide which accounts to withdraw from for maximum tax-efficiency.

• Robo-advised. For a more automated, less time-consuming approach, you could consider a robo-advisor, which uses algorithms aimed to help optimize your retirement income stream in a disciplined, tax-smart manner across all your accounts.

  As with the self-directed approach, the robo-advisor uses various factors related to your current financial situation to figure out how long your money will last at various levels of annual spending. It then devises an optimal mix of investments for your retirement portfolio to generate predictable income, and will rebalance the mix of investments based on your needs and opportunities for tax-efficiency. Most important, it keeps tabs on your withdrawals so you stay on track and suggests adjustments as necessary.  

  While a robo-advised solution makes automated recommendations, you remain in control throughout the process, having final say and maintaining 100% visibility into your investments.

• Advisor-led. Those looking for a higher level of support could benefit from working directly with a financial advisor or consultant. These experienced professionals will help tailor your retirement plan to your needs, including running various simulations to determine an initial withdrawal rate that aligns with your specific spending goals. This highly personalized approach also means your advisor will check in often to ensure your plan is working as intended and will make adjustments as needed to help extend the life of your savings.

  And because they have a clear view of your entire financial picture, an advisor can also help guide you through other aspects of your financial plan, such as estate planning, charitable giving, risk management, and more.

No matter your comfort level with retirement income planning, there's a solution that will help you get on track and stay there to make your money last in retirement.