A typical retiree will need enough income to last for 30 years or more. The ultimate goal of retirement planning is to avoid running out of money. To make your nest egg last as long as possible, some financial advisers in recent years recommended that retirees maintain a significant exposure to stocks. The higher returns that equities have historically provided were thought to help ensure that retirees don't outlive their assets. But investors who followed this advice are now suffering the steepest losses. Still, avoiding the stock market completely means your nest egg may not stay ahead of inflation or meet your financial needs. "Someone 60 years old still has a long-term time horizon, and you must have some money in the market," says Guy.
Drawing down your assets by 4 percent annually is generally considered a prudent way to make your retirement stash last the rest of your life. Using this strategy, an ambitious retirement saver who managed to accumulate $1 million would typically be able to spend approximately $40,000 a year throughout retirement. If that $1 million nest egg shrank to $600,000 this year, 4 percent of the current balance is just $24,000 this year. Healthy retirees likely to live a long life could deplete their portfolios too quickly if they withdrew significantly more than 4 percent.
To bridge the gap, retirees should keep between two and five years' worth of living expenses out of the stock market in completely safe investments like CDs. Seniors who can get by without tapping their retirement assets won't be required to make withdrawals from their withered IRAs, 401(k)'s, and 403(b)'s this year. The Worker, Retiree, and Employer Recovery Act, passed in December, temporarily suspends an excise tax levied on seniors over age 70½ who fail to take a required minimum distribution from their retirement accounts in 2009.
Cutting expenses as much as possible will also help. Hedy Vahabzadeh, 56, a secretary, and her husband, Hossein, 63, a retired controller, downsized from a $400,000 house in Sparta, N.J., to a $169,000 home with a pool in Jersey Village, Texas. "Especially in this market, we don't want to touch the 401(k)," says Hedy. The frugal couple will put off buying new cars longer than usual to cut costs, and their daughter, 33, and 5-year-old grandson also live in the same house to cut living expenses for the entire family. Says Hedy: "In this economy, I think that there's going to be more households like us with more than one generation in one house."