: How to retire well — even if you’re not rich

Unquestionably, the best time to retire is after you have saved up more money than you will ever need. But not everybody can do that. If you are one of those people, then this article is for you.

In order to retire with savings that may be adequate (though not necessarily ample), you’ve got to make every dollar count. You also have to make every decision count.

This involves some delicate balancing acts in how you invest your money, how you withdraw that money, and the lifestyle you adopt.

The main focus of this article is on how you withdraw your money, but all those factors are intertwined.

When you’re planning (and managing) your retirement finances, your most important goal should be to avoid running out of money.

Read: My wife and I are in our 50s with $300,000 in a 401(k) and $700,000 in a pension. Will we have enough to ‘live a simple life’ in retirement?

Because you don’t know how long your life will last, you have to assume that you’ll keep on living, and your portfolio will have to keep on generating enough to meet your expenses.

In short, you need a plan. The plan should include how much money you need to live an acceptable or desirable life, how you invest your money, and how much you will withdraw from your portfolio every year.

Financial planners commonly recommend annual withdrawals of 3% to 5% of your portfolio’s value. If you can meet your needs taking out 3%, you’re very unlikely to run out of money.

If you take out 5%, you’ll certainly have more to live on and you’ll probably be fine for a while. But that level of withdrawals is less likely to be sustainable over a long retirement. A 4% withdrawal rate may be a “sweet spot” here.

Read: What is the ‘ideal’ time to claim Social Security?

For many years I’ve published and updated a set of tables showing hypothetical year-by-year results (starting in 1970) from various portfolios and rates of withdrawal.

You can use these tables to see how much of your portfolio you should plan to withdraw each year.

To quickly see how these work, find Table D1.5. It has 10 columns, each of which shows year-by-year portfolio values for a percentage combination of bond funds and the S&P 500 index

In this table we assume you took out $50,000 (5% of your portfolio) in 1970 and then adjusted that amount each year to keep your spending ability up with actual inflation.

Scroll down and you’ll quickly see that the end-of-year portfolio values disappeared in each column, starting in the late 1990s — when the increasing demands for annual withdrawals became too much. In other words, those plans ran out of money.

Now look at Table D1.4, where you’ll see what would have happened if you started your retirement by taking out $40,000 at the start of 1970 … and bumped up your withdrawal every year to reflect actual inflation.

In that case, your money would have easily lasted 52 years, which is much longer than most people have in retirement.

Table D1.3 shows the effect of 3% withdrawals, while Table D1.6 shows the scary scenario of 6% withdrawals adjusted for inflation.

Fortunately, you’re not stuck with those results. You can control another very important variable: the way you invest your money. And this can make a big difference.

First, of course, there’s the delicate balance between equities, which in the long run should help your portfolio grow, and bond funds, which should give you peace of mind.

Second, as you can see if you scroll down farther in the tables, your results will be different if you diversify your equities beyond the S&P 500. This, by the way, is something I strongly recommend.

Tables D9.3 through D9.6 show the results from using a popular U.S. four-fund strategy. This involves dividing your equities in equal parts of the S&P 500, large-cap value stocks, small-cap blend stocks, and small-value stocks.

Table D9.5, for example shows that combination would have supported 5% withdrawals for 40 years of retirement as long as you had at least 30% of your money in equities.

When your equities were limited to the S&P 500, there was no combination that came close to that.

Other tables show results for equity portfolios that include international funds and (in Tables D10.3 through D14.6) some more aggressive equity combinations. These combinations produced higher long-term returns, and in quite a few cases held up considerably better than the S&P 500.

I encourage you to study these tables and look for combinations that seem sensible to you.

To summarize:

As I said, the single best thing you can do is begin your retirement with as much money as possible. In this article, I argued that many people could effectively double their retirement income by postponing it five years.

Second, consider diversifying your equities beyond the S&P 500. Although there’s no guarantee, in the long run, diversified portfolios have very often fared better than those based on just that popular index.

Third, no matter how much or how little money you have available to spend, you will benefit if you can live a bit below your means.

Of course you want to live a satisfying life. But that life will be better if you build in a bit of cushion to deal with unexpected needs and opportunities that are sure to arise.

I can’t overemphasize the value of the data in the series of tables I have referred to. Over the years they have helped thousands of investors figure out what they need to save, how to fine-tune their investment risk and how to plan for withdrawals.

All these numbers might seem daunting. If so, it’s probably worth your while to go over them with a fiduciary financial adviser who does not have products to sell.

To learn more, check out my podcast about fixed distributions. In an upcoming article, I’ll discuss ways you can safely take more from your retirement portfolio.

Richard Buck contributed to this article.

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