Saving for retirement is hard. Knowing how to spend it down is harder.
One of the biggest things on my mind these days is retirement.
I am a few months from turning 64, so I'm not putting in my notice anytime soon. But 25 million or so Americans, ages 55 to 64, are, like me, wondering what they will live on during their "golden years."
I have to be honest: I thought the hard part was living within your means and saving for retirement. It's not. Trying to figure out how to cash out your nest egg -- your tax-deferred retirement account, your taxable investments or both -- so it will last the rest of your life can be even harder. It has me gnawing at my fingernails.
There are many variables when figuring out retirement finances. How well do you want to live? Do you want to leave anything? Do you want to help the kids or others? Charity?
One point that needs to be made is this: If you're worried about your retirement money lasting, pay off as much debt as possible before you retire. Get rid of the monthly mortgage and car payments if you can. Keep credit-card debt under control.
Jeffrey DeMaso recently wrote a two-part series on this subject for the Independent Adviser for Vanguard Investors, a newsletter for which he is director of research. So I called him.
The first question is, "How long do I have left?"
Men who make it to age 65 in 2020 will have, on average, an additional 19.3 years, according to the U.S. Social Security Administration. Women that age will have, on average, an additional 21.7 years. So let's just say, right off the bat, that you can expect to live for 20 years after retiring.
Now let's discuss, "How much do I need?"
Household expenditures for Americans 65 or older, as of 2017, averaged $49,500 a year, according to the U.S. Bureau of Labor Statistics. Income from Social Security and pensions for those same households averaged just shy of $25,000, the BLS said. (We are talking pretax money here.)
"That leaves a $25,000 gap that you need to fill," DeMaso said. Where do you get that money?
Statistics on retirement savings are all over the place.
Vanguard Group reports that its average 401(k) account, the popular tax-deferred employee savings plan, holds $104,000.
The Center for Retirement Research at Boston College said data from 2016, the most recent available, indicated that households approaching retirement had a median balance of $135,000 in a tax-deferred 401(k) or individual retirement account (IRA).
The median account balance for someone in their 30s earning $40,000 to $60,000 a year is $34,799, according to the Investment Company Institute, which represents the mutual fund industry. The median account balance was $375,718 for people in their 60s who earn $100,000 a year and who have had decades to save, according to ICI.
Let's say, for argument sake, that you have saved $1 million and that you want to depend primarily on the income that it generates and to preserve the principal. A million bucks sounds like a lot, but is it really?
Many money managers live by the "4 percent rule." That rule of thumb, introduced in 1994 by financial adviser William Bengen, posits that a retiree can live safely for 30 years withdrawing 4 percent from their portfolio, with annual adjustments for inflation.
Four percent of $1 million is $40,000 pretax dollars. That takes care of the $25,000 gap, at least on paper.
But stock markets fluctuate. Your $1 million portfolio might increase to $1.3 million in a good year. Or it could get crushed, the way the Standard & Poor's 500 index was crushed when it finally bottomed out March 9, 2009. The peak-to-trough drop -- from Oct. 9, 2007, to March 9, 2009 -- was 56.78 percent.
If you invested $1 million in an S&P 500 index fund at the top of that market cycle it would have been worth about $432,200 when the market hit bottom.
"Investors need to be able to ride through that kind of volatility," said Howard Silverblatt of S&P Dow Jones Indices. "People in their 20s will see many bear markets. Retirees may not have the time to ride out a down market."
There has been a lot of discussion about the 4 percent rule, with some people arguing that you should withdraw less and others arguing that you can withdraw more. It depends, in part, on whether you want to preserve your principal at all costs or are willing to spend it down as you grow older.
Some thrill-seekers may pull out 8, 9 or even 10 percent, but financial advisers do not recommend that you spend at that rate for very long.
"If it's only going to be for a couple of years, maybe that's fine," DeMaso said. "But retirement isn't static. if you think you can stay at 8 percent for decades, that's probably not realistic. The 4 percent rule still does roughly hold."
I don't know that much about the bond market. But I am pretty sure bonds aren't paying anywhere near 4 percent, unless you go into high-risk territory.
You can probably find some dividend-paying stocks -- for instance, shares in oil companies, telecoms and utilities -- that yield 4 percent or more. But you might sacrifice long-term appreciation because dividends tend to be paid by lower-growth companies.
One way to conquer your fear of running out of money is to buy an annuity. Most annuities are sold by insurance companies. They aren't cheap. They can be complicated. And you are handing over a big chunk of cash, maybe your entire life savings, which can be difficult for some of us
"Annuities can sound really great on paper, and they try to remove the risk of running out of your money, which is what everyone is worried about," DeMaso said. "But they are often expensive. There is not a free lunch."
Our financial adviser has talked to me and my wife about annuities, but we balked for the reasons DeMaso cited.
A Marcus online savings account, with Goldman Sachs, is paying 2.25 percent annual interest. That would yield $22,500 on your $1 million in savings. Not bad for a savings account these days.
As a financial conservative, I lean toward the classic balanced investment portfolio of stocks, bonds and enough cash to ride out any tumult. Stocks are a hedge against inflation because the companies that issue them can increase prices.
BlackRock chief executive Larry Fink has said that people should be 100 percent invested in the stock market and stay that way.
But stocks will almost surely drop at some point, as they did last fall, when the S&P 500 fell 14 percent. So having some bonds -- to absorb the volatility and keep your blood pressure down -- is wise. I also keep some cash around to tide me over for a year or two, so I don't have to sell stocks in the midst of a shellacking.
But how to create a stream of income from a balanced portfolio?
We can look again at dividends, but they're unlikely to provide enough. The S&P 500 dividend yield is 1.97 percent. Do the math, and your $1 million in an index fund is throwing off $19,700 a year in dividends.
Another option is to sell some stocks or mutual fund shares every year instead of trying to preserve your principal and live only on the dividends.
"People should focus on the total return of their portfolio," DeMaso said. "That includes capital appreciation and dividends. The point is not to be singularly focused on income. Look at the whole portfolio."
There are some other strategies out there. You could get a reverse mortgage. And some states and localities allow retirement-age homeowners to defer property taxes, with the deferred amounts to be paid with interest when the house is sold.
"Home equity is usually a person's largest asset," said Amy Grzybowski of the Center for Retirement Research at Boston College. "If you have a gap in terms of the income you need and don't have enough through traditional pensions or Social Security, you can tap your home as an asset."
You can also work, and save, until you're 70, when the Internal Revenue Service will make you start spending your retirement savings.
If you have your savings in a tax-deferred retirement account, the IRS will require that you begin withdrawing a minimum amount after age 70 1/2. It's called the required minimum distribution, and it currently is in the neighborhood of that golden 4 percent rule.