As a general rule, if retirees limit their initial withdrawal to 4 percent of their investment portfolios—and then increase that dollar amount by 3 percent a year for inflation—they should stand a 9-in-10 chance of being able to sustain that income stream over 30 years, according to Fahlund. Individual situations vary, of course; you may want to consult your financial adviser.
Having a cash cushion in place can help prepare you to trim those withdrawals or hold steady if markets turn bearish, as they have this past year.
4. Keep an eye on asset allocation: Whether you're skittish about them or not, stocks (and stock funds) rule. They are the one investment that can provide the growth you'll need over a long retirement, Fahlund says.
A portfolio's asset allocation will differ from retiree to retiree, depending on individual factors like risk tolerance. In general, at retirement your holdings should consist of as much as 60 percent stocks, say the retirement portfolio managers at T. Rowe Price. That percentage should glide down and hover a notch below 40 percent even in your 80s. Other money managers may suggest significantly different allocations.
The key to charting a smart retirement portfolio is "risk management," Orecchio says. To ride out volatility, spread your risk across a diverse spectrum of equity investments here and abroad, including in emerging markets. Slice those broad categories into large and small companies. Diversify bond holdings by maturity and credit quality. Then rebalance yearly. In down markets, you might want to do so more frequently. "Markets will fluctuate over the next 20 or 30 years. You can be certain of that," he says. But a diversified portfolio will spread the risk.
A life-cycle, or target-date, fund can ease your angst. This single investment gives you all sorts of stocks and bonds in one package. Plus, you get to choose the mix you want. The funds are professionally managed, growing more conservative as you age. Lots of retirees are using such funds. New investors helped boost life-cycle-fund assets by 61 percent last year, according to the Investment Company Institute.
5. Tap in: Generally speaking, to get the most from your savings, pull from your taxable accounts first. Interest from bank CDs, bonds, and money market funds is taxed at ordinary income rates. For any dividends, interest, or capital-gain payouts, you will owe taxes the year you receive them. U.S. government bonds are free from state taxes. Municipal bonds are free from federal tax and state taxes, too, if you live in the state that issued them.
Enjoy the tax deferral on your retirement accounts as long as you can. Once you reach 70½, though, there is a minimum withdrawal schedule based on your life expectancy. There are exceptions, of course. For example, if you're still working and contributing to your employer's 401(k) plan, and the plan allows it, you don't have to take withdrawals from the plan until April 1 of the year after you retire. The rules on required minimum distributions are in IRS Publication 590, available at irs.gov. You may want to consult a tax adviser. You're taxed at ordinary income tax rates on the amount you withdraw (except any after-tax contributions). Not withdrawing as much as you should each year can result in a 50 percent tax penalty on the amount you didn't take. Missing required minimum distributions is perhaps the single biggest mistake for IRA holders.
Roth IRAs are the last accounts to dip into and, for many retirees, may ultimately prove to be a winning solution to not outliving savings. Withdrawals from Roths aren't taxed at all provided you're at least 59½ years old and have held the account for at least five years. You've already paid tax on your Roth contributions, and all the compounded growth is tax free. Ah, sweet salvation...in a far-off year like 2023.