Go ahead, retirees, live a little

By U.S. News & World Report

The financial-services industry and the media have apparently done a good job of convincing people they need to save more for retirement and frightening them that their nest eggs won't last. A new survey indicates that once retired, most Americans are reluctant to spend their dough.

Three-quarters of retirees ages 60 to 75 with at least $50,000 in household assets either kept their nest egg principals intact over the past year or actually added to them, according to an AARP and American Council of Life Insurers survey released in December. Only about one-quarter dipped into their savings.

"People are so concerned about outliving their nest eggs that they will skimp on certain expenses," says Jean Setzfand, the director of AARP's economic-issues agenda.

• Talk back: How do you know if you've saved enough for retirement?

That may be good news for the financial-services industry, which collects fees on the more than $7 trillion in assets held in individual retirement accounts and 401(k)s, but AARP thinks retirees shouldn't be afraid to live a little, assuming they have the means and take the time to budget for a long life and the possibility of health expenses.

Here's how you can tap your nest egg while making sure it lasts your lifetime:

Withdraw the appropriate amount

Retirees take a variety of conservative approaches to spending their savings, the survey found. Many withdraw money only for emergencies (23%), take only interest, gains or dividends from savings and investments (14%), or withdraw no money at all (13%).

"Most of our clients don't want to dip into their principal," says Steven Medland, a certified financial planner and partner at TABR Capital Management in Orange, Calif. "For most of our clients, their spending doesn't go down a whole lot in retirement, and it is smart for them to be cautious."

But some financial advisers say it's OK to dip into principal as long as you have a plan to make it last.

"That principal is there to be used," says William Reichenstein, a chartered financial analyst and professor of investment management at Baylor University. "You should be working into principal conservatively."

The magic number, according to Craig Copeland, a senior research associate at the Employee Benefit Research Institute: "Take 4% of your assets out every year, and you can expect to have enough money to last you 25 to 30 years."

But only 13% of retirees regularly draw down a constant percentage of their nest eggs, AARP found.

Spend taxable dollars wisely

"You want to minimize the tax rate," Reichenstein says. You can do this by taking money out of a 401(k) until you are near the top of a tax bracket and then withdrawing the rest of the cash you need from a Roth IRA or Roth 401(k) that you had paid taxes on earlier in life.

Tax rates can fluctuate from year to year in retirement if you don't have a steady income stream other than Social Security. So you should take more than the minimum required withdrawal out of your traditional IRA or 401(k) -- and pay the extra income tax -- in years when you are in an especially low tax bracket or toward the bottom of a tax bracket.

"Those tend to occur for most individuals late in their life -- if you need to go to a nursing home or if you have high medical expenses. In those years you will probably be in a low tax rate," Reichenstein says.

If you can make retirement accounts last, it's also sure to help you cover your medical bills.

Continued: Plan for the unexpected

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