Once you retire, you’ll be ready to start using those savings you’ve worked so hard to accumulate. Adopting a random approach of simply withdrawing the amount you need for the year’s living expenses is risky. It’s far better to have a plan for making your money last. Here are some potential strategies.
Invest your savings and live on the investment income (dividends and interest). This plan has one major advantage: You’re practically guaranteed not to outlive your savings. You have control over your investments and can access your principal should a financial emergency arise. The chances of having money left to pass on to your beneficiaries are very good.
Now, the disadvantages: The amount of income you can take each year will vary, depending on interest rates and dividend yields. In an effort to preserve principal, you could end up shortchanging your retirement lifestyle.
Invest your savings and make carefully planned withdrawals. This method generally provides a more predictable — and higher— level of income. As with the first plan, you have full access to your principal and may tap into it to some extent from time to time. However, this approach has one big drawback: longevity risk — the risk of outliving y our resources. Assuming that doesn’t happen, the amount left for your beneficiaries could be smaller than with the spend-income-only approach.
Buy an annuity to lock in a lifetime income. This plan offers protection against longevity risk. On the other hand, after payouts begin, you generally don’t have full access to the assets you invested. And the opportunity to leave a legacy may be limited. Finally, since an annuity is a contract with an insurance company, there is an additional risk that the company may experience financial difficulties and be unable to meet its obligations.
Use a combination of methods. This strategy calls for using a portion of your savings to purchase an annuity that “locks in” a certain amount of income. You would then manage your remaining assets according to your needs.