6 ways to make your nest egg last forever

By Kiplinger's Personal Finance Magazine

The oldest baby boomers are 60, yet many of them still don't know whether they are saving enough or how to convert those savings into a lifetime of retirement income. If you're one of those 41 million boomers who are now 50 to 60 years old, the next five to 15 years will be critical. That's when you'll need to top off your retirement savings, focus your investment strategy and figure out how to maximize your income after your paychecks stop.

For many people, work remains an important part of their lives -- financially as well as personally -- even after they retire. Michele Sabatier's pension from the National School Boards Association, where she worked for 18 years as a graphic designer and art director, will buy her the freedom to pursue a new career as a teacher. After resigning from the association earlier this year, Sabatier plans to trade a two-year commitment with the Mississippi Teacher Corps for a free master's degree in education at the University of Mississippi. When the two years are up, she can apply to teach anywhere she likes. "I had reached an age where I wanted to do something different with my life," says Sabatier, 51.

Now that her only child has graduated from college, she's eager to move from northern Virginia to a less expensive area. She plans to take her pension as a lump sum -- a wise move because she is divorced and a monthly benefit would be passed on only to a surviving spouse. "I can't imagine doing absolutely nothing," Sabatier says about her ambitious plan for the next phase of her life. "I think it's interesting how our retirement will be so different from that of our parents' generation."

If you want your retirement to be ideal as well as different, these strategies will get you off to a good start:

Get a financial checkup

The five years before you leave your job and the five years after are the most critical transition periods for investing and financial planning. As your priority shifts from accumulating money to shepherding it through retirement, you'll probably benefit from some financial guidance.

A newly approved pension-reform law will make it easier for employers and 401(k) providers to offer investment advice to workers. Some providers, such as Principal Financial Group, already offer one-on-one counseling to workers who are within five years of retirement age. If you're behind schedule, you might be urged to boost your contributions or work longer. Mutual-fund companies encourage new retirees to roll over 401(k) and other retirement savings into an IRA, in exchange for advice on investing for growth and income and for guidance on withdrawing money.

Principal Financial calls the five years before and after you retire the red zone. It's the time when workers 50 and older can make catch-up contributions to their 401(k)s and other retirement plans. They'll also confront crucial decisions about retirement benefits and investments. For example, if you're lucky enough to have a traditional pension, you may be able to choose between taking a lump sum or a monthly check. Deciding when to collect Social Security benefits can also have an effect on your cash flow.

If you've been an aggressive investor, it's probably time for a portfolio makeover. Severe market downturns during the first few years of retirement -- or just before it starts -- can mess up the rest of your life. Although you should not park all your retirement money in bonds and bank accounts, you can surely do without the riskiest kinds of investments.

An illustration from Prudential underscores how vital it is to avoid large losses during the red-zone years: Even if your retirement investments average a 7% return for 30 years, the sequence of year-to-year returns will determine how long your money lasts. Let's say you retire at 62 with a lump sum of $250,000 and intend to withdraw 5% of the portfolio's value each year. If you lose a bundle during your first few years of retirement, you could run out of money by age 79. But if you enjoy double-digit profits early on and your losses come later, you'll end up with more than twice as much as you had when you started -- even after taking annual withdrawals and allowing for some disastrous drops toward the end of the 30 years.

Set your budget

The possibility of running out of money is the main reason financial advisers such as Christine Fahlund, of T. Rowe Price, urge you to go slow, limiting your first year's withdrawals to 4% of your total retirement funds. Then you can raise the draw by 3% a year to cover inflation. If you start at $500,000, you can safely withdraw $20,000, or 4%, during the first year. Then you boost the second year's take to $20,600, the third year's to $21,200, and so on.

While that sounds conservative -- and it is -- there's a reason. The strategy is intended to help you survive should a bear market strike as you begin your retirement. On the other hand, if your investments perform well initially, you can reassess the situation after a few years and pay yourself more.

Unfortunately, few prospective and current retirees are aware of these guidelines. A recent survey by New York Life found that only one in 10 people could identify 4% as an appropriate initial withdrawal rate. Nearly half thought it should be more.

David Colescott is living proof that the 4% rule works. After retiring at age 65 in 1999, when the stock market was soaring, the Pinehurst, N.C., man enrolled in T. Rowe Price's Retirement Income Manager program. That was early in 2000, just before the three-year bear market began. Even though his portfolio took a hit during those down years, he's been able to recover and give himself a raise every year since. He has no concerns about outliving his money.

Colescott, who is a former Marine and international communications consultant, calculates that even if his investments don't earn another dime -- which is unlikely because he has 60% in stock funds and 40% in bond funds -- he'll still be able to withdraw money at his current rate for another 15 years. Colescott's advice: Be cautious with your withdrawal strategy but not too timid with your investments, because you'll need some growth to sustain you through a retirement that could last for decades.

Do a dry run

As with most things, practice makes perfect. That's why Ed Fulbright, a CPA and financial adviser in Durham, N.C., advises near-retirees to test-drive a retirement budget. "If you can live on your projected retirement cash flow for two to three years without increasing your debt, then you know that you can make it in retirement," Fulbright says.

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