Once you retire, your "nest egg" replaces your job as a key source of income to cover your expenses. You could live to age 85, 90 or older, and inflation will always be a factor. It takes some planning to make sure you can pay your bills now while also saving enough so that decades down the road, you'll have enough money.
The 4 Percent Rule
A widely used rule of thumb is to draw 4 percent of your nest egg each year as income. The idea is that your investment portfolio will grow by more -- say, 6 to 7 percent annually. Your account will grow, and the 4 percent slice will increase each year to keep up with inflation. Consider whether annual returns of 6 to 7 percent are a valid assumption based on your investment choices, and what to do for the years your portfolio doesn't grow at least 4 percent. Depending on the size of your nest egg and your current expenses, a more conservative 3 percent withdrawal rate might work.
Stocks As Well As Bonds
For a nest egg to grow and provide a higher income in future years, it is very likely that part of your portfolio needs to be invested in stocks. Sticking with a 100 percent bond portfolio might pay enough income now, but that income probably wouldn't keep up with inflation. And lower bond rates in the future would be a double hit -- along with inflation -- on your retirement income. In spite of the volatility of the stock market, stocks are the best assets for growth in your nest egg, and the higher values can be converted into a bigger retirement income. The 30 to 40 percent of your nest egg in the stock market can be in the form of mutual funds or exchange-traded funds.
Buckets of Money
An article in "Kiplinger" magazine discusses the strategy of dividing your nest egg into buckets. One bucket is money set aside to pay for off-budget expenses such as car repairs or a vacation. Another account is two to three years worth of monthly expenses, kept in a very stable investment account. You can draw from this account without worrying whether the markets are up and down. The rest of your nest egg is in longer-term investments. When nice gains are earned, a portion of them are transferred into the stable account.
Managing Your Budget
An important part of making your nest egg last is to have a budget that lets you live within the income your investments can safely provide. If your expenses when starting retirement are low enough to not put stress on your nest egg, your investment portfolio will be better able to handle higher future costs. Other income sources, such as Social Security or a pension, will be part of the budgeting process.
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