by Rick Zurbriggen

It used to be pretty easy to plan your retirement income. Company pensions guaranteed retirees a lifetime income, life expectancies were not that much longer than normal retirement age, and the typical retiree wasn’t that active. Life was simple.

Today’s baby boomer generation is facing a much different scenario. They are active; they travel, exercise, run marathons, do triathlons, and seem to enjoy their life much more than the generation before them. The money they have has been saved by them, through their 401(k) plans, the running of a business, or the sale of their real estate. The bad news is that there are very few pension programs, and social security may or may not survive their lifetime, so they may actually outlive their incomes.

Today, based on actuarial tables from the year 2000, the average sixty-five-year-old couple has a 50 percent chance that one of them will live to be ninety-two years old, and a 25 percent chance that one of them will survive to the age of ninety-seven! That is great news for all of us, as long as we are able to maintain our health and maintain our incomes. I once had a client tell me that the biggest fear he had was running out of money before he ran out of life.

The real problem with having longer retirements is that inflation plays an even bigger role in eroding your purchasing power. Even a 3 percent average inflation rate will erode the value of your income by 50 percent in thirty years. In other words, it will take twice as much income to live thirty years from now than it does today.

So the real question is, how do you get your money to survive your lifetime and still provide an income that will at least keep up with inflation? How much can you safely withdraw from your investment portfolio without running out of money before you run out of life?

My first piece of advice is: Don’t do this alone. Find a wealth manager that specializes in income planning. He or she can make sure that your portfolio is diversified into the correct categories, allocate it in the correct asset allocations, and put your accounts with institutional portfolio managers who have track records of low volatility in different market conditions.

That being said, there are some basic rules of thumb that will help in your planning. First of all, since you have a high probability of living a thirty-year retirement, there are basic asset allocations and withdrawal rates that can help your money last. Using average rates of return and average inflation rates can be dangerous in your planning. Your portfolio will hardly ever produce consistent rates of return. Some years will be above average, some will be below, and the same can be said for the inflation rates.

Using a computerized program that looks back at up to one thousand random time frames, assuming different investment allocations and withdrawal rates, provides us with a much more realistic view. There are some basic factors of which you should be aware. Having your portfolio split up into a basic 60 percent stocks and 40 percent bonds allocation, and only taking a 4 percent withdrawal rate from your account, has an 87 percent probability of surviving a thirty-year time frame and keeping up with inflation.

As an example, a $2-million portfolio would safely support an $80,000 per year income stream that would be able to increase with inflation each year for thirty years. If you take much more than that, your odds substantially decrease. With a 5 percent withdrawal rate, or $100,000 a year from the same $2-million portfolio, the probability drops to just a 63 percent chance of lasting the same thirty years. A 6 percent withdrawal rate only has a 38 percent chance of surviving the same thirty years. The safe withdrawal rate for a thirty-year retirement is between 3 and 4 percent.

There are other alternatives out there that will provide guaranteed income streams of more than that by using variable annuities and immediate annuities. These plans could have a place in certain situations and could help provide some peace of mind for those who want a guaranteed lifetime income. They have drawbacks as well, in additional fees to provide those guarantees and a lower chance of being able to keep up with inflation.

There are so many things in life that are more important than money. But not having money, or having to worry about losing your money, can certainly keep you awake at night. My advice is to go meet with a wealth manager who specializes in income planning and let them do all of the work.

There are only 168 hours in a week, so spend time on the things that are more fun and much more important than your money, things like your relationship with your kids, spouse, and friends. Spend more time riding your bike than you do watching CNN. Go visit a new country that you have only read about instead of trying to figure this stuff out on your own. Read a new novel instead of trying to make sense of Money, Forbes, or the Wall Street Journal. Listen to the ocean waves hitting the beach instead of some analyst making the next big prediction for today’s markets. Once your financial situation is taken care of, you can spend more time enjoying and improving your quality of life.

Rick Zurbriggen is a freelance financial writer living in Sanibel, Florida. He is the creator of The Asset Longevity Series.