Perhaps you rely on your savings to supplement your Social Security and Pension incomes. If so, make sure you revise how much you withdraw each year to make your savings last.
Ideally what you take out of your savings should increase with inflation each year so the purchasing power of your withdrawals remains constant to maintain your living style. But of course you don't want your remaining savings to shrink to support those withdrawals. So you must plan for what you can withdraw annually to also preserve your portfolio against loss in its value.
As a retiree, you ought to have at least 50% of your saving portfolio in high quality income generating investments. The remaining 50% should be in high grade equity investments. You need those equity investments to help grow your portfolio and offset inflation's diminishment of its overall value.
A tentative 4% withdrawal rate Considering the average performance of markets, many advisors recommend using a maximum of 4% as a withdrawal rate from your savings. That statistically allows for preserving the portfolio's real value and the real value of your withdrawal's purchasing power. So, the quantity of money you withdraw each year increases with the inflation rate.
But investment markets do change – moving from bear markets to bull markets, and back. And that affects your earnings. If you experience a bear market (ie those headed down) and sideways markets early one in your retirement, adjust your withdrawal rate downward.
That's because that 4% withdrawal rate doesn't work for bear markets. If you let your portfolio go down early in your retirement, it may not be able to recover later early enough during your retirement years to supply your initial savings' income when a bull market eventually returns.
Frugality and an annual appraisal of your withdrawal rate Try to reduce your living expenses to ease the need for tapping the full 4% of your portfolio income. Perhaps you can postpone travel, spend less on restaurants and entertainment, and replace cars and other items less often. Bear markets last about 2 years.
When the bull market comes back, you can bring your withdrawals up to the 4% – and maybe splurge a little too. If you stick to just the 4% during bull markets, you'll build surplus growth in your portfolio that'll will allow you to maintain the 4% during later bear markets.
Having about 2 years emergency cash – in CDs and money market accounts – when you begin your retirement is helpful too.
