Make Sure Your Savings Outlast You

Savings OutlastBy Toma Franklin, Staff Writer

You don't know how long you'll need your retirement money to last or how much your investments will earn. Ideally, you'd like to be able to live off your investment earnings, so you'd better have plenty of savings. Most planners recommend that you expect to live 30 years in retirement.

Here are three strategies to make sure your savings outlast you:

Start Small

A pioneering study at Trinity University in Texas looked at the success rate for different retirement portfolios during the withdrawal phase. "Success," in this case, meant having money left over at the end of the period. The study used actual returns from 1926 through 1995. It assumed that you withdrew a percentage of your portfolio at the outset and then increased that amount each year for inflation.

The findings: If you adjust your withdrawals for inflation and maintain a portfolio of 75% stocks and 25% bonds, your initial withdrawals should be 4% to 5%. The 4% initial withdrawal had a 98% success rate; at 5%, the success rate fell to 83%.

If you forgo inflation raises when the markets are hard hit, your odds of success increase considerably. "Be flexible when times are particularly good or particularly bad," says Jonathan Guyton, a Minneapolis-based financial planner. And take your withdrawals from your winning investments, not your losers.

Go Variable

If you really want your portfolio to last forever, consider withdrawing a fixed percentage of your portfolio each year, rather than starting with a percentage and increasing that amount by the inflation rate each year. Be prepared to make some big adjustments, though. Suppose you had used this strategy and started with $100,000 invested in the S&P 500 in 1995. Your income would have varied from $416 a month at the outset to $1,096 a month in 2000. This year: $769.


An immediate annuity is fairly simple: you give the annuity company a chunk of money, and it guarantees payments that last your lifetime. You can also get payouts based on the lifetime of you and your spouse—or for a certain number of years.

Annuities can sometimes offer decent payouts, because the money from people who die in two years subsidizes the people who live to be 110.

A 65-year-old man who invests $100,000 in an immediate annuity could get a lifetime income of $662 a month, according to For a 65-year-old couple, the payment falls to $573.

The drawback is that your payments remain the same. The Vanguard Group offers an annuity with an inflation rider: Payments increase in line with annual changes in the consumer price index. The inflation rider reduces the initial monthly payment. It would start at about $503 a month for a 65-year-old man and $454 for a woman the same age. A reasonable approach might be to put part of your savings in an immediate annuity and tap your savings when needed.

Retirement savings really can outlast you

Unless your retirement hobby is juggling sticks of dynamite, you need to figure out how to make your retirement savings outlast you. That isn't easy, particularly if you take inflation into account. Today, we'll give you three ways of making sure your savings outlast you — and not one of them involves explosives.

Investing in retirement is just as important — and, arguably, more difficult — than investing for retirement. After all, you don't know exactly how long you'll need your money to last. Nor do you know how much your investments will earn. Ideally, you'd like to be able to live off your investment earnings. If so, you'd better have a lot of savings. The 10-year Treasury note, for example, now yields 4.64%. If you want a $50,000 annual income at that rate, you'll need to start with about $1.1 million. If you can't live off your income, you'll need to tap your principal. The longer the payout period, the less you can tap each year. Most planners recommend that you expect to live 30 years in retirement.

Inflation helps determine how much you need, too. If your retirement fund were a mighty oak, inflation would be a beaver. For example, a bag of groceries that cost $50 in 1985 will now cost $92. Unless you pull out more from your savings each year, you'll have to lower your standard of living. Finally, you have the problem of enormous variations in returns. Consider the hapless investor who put $100,000 in the S&P 500 in August 1987. If he took out $500 a month, his account would have fallen to $69,100 in three short months.