How to Manage Your Retirement Savings

Decisions about how best to manage your retirement savings are a function of your priorities, the kind of retirement livelihood you want, your accumulated assets and what you really care about.

The need to optimize your retirement portfolio in order to convert your accumulated assets into a stream of income without exhausting your funds too soon is not a simple matter due to uncertainties, such as the length of you retirement lifespan. Conventional wisdom and “rules of thumb” regarding the issue of standardized withdrawal rates do not protect against the risk of outliving your assets. How do you make sure that you do not run out of money? How do you ensure that you can achieve the kind of retirement lifestyle that you want?

The answers to these questions and others about the best way to manage your retirement investments depend on the nature of your retirement accounts, what your portfolio is invested in and your priorities. Are you concerned about market volatility? Are you concerned about how best to plan for retirement spending?

In addition to making periodic withdrawals from your investment portfolio over the years, you must develop an investment strategy – how much to allocate between stocks and bonds. However, a withdrawal plan, which requires you to draw a fixed amount from a portfolio consisting of investment assets, involves the possibility of depleting your portfolio too soon.

The advantage of such an investment based withdrawal plan is that of increased liquidity, participation in the capital markets and the possibility of leaving an estate. However, the problem of running out of money is compounded by the uncertainty of assumptions about capital market performance, the length of your retirement lifespan and consumption. In light of these uncertainties, how do you lessen the possibility of running out of money? The risk of running out of money can be mitigated by optimizing your retirement portfolio with an “asset mix” that can be set to eliminate the possibility of depleting your retirement assets.

An important question to address is whether you would benefit from following a “mixed withdrawal strategy” backed by a properly diversified investment portfolio. By quantifying your risk and return profile, you can develop a withdrawal strategy based on the expected value of your 401k and other benefit payments. The appropriate mix depends on your attitude toward risk, your need for liquidity as well as key assumptions regarding the capital market.

The best plan will provide the benefit payments you need for your level of retirement spending without the risk of your payments falling and without the risk of running out of money.

Resources: For more information about managing your retirement savings, see Chapter 7 of Securing a Retirement Income for Life: Strategies for Managing, Protecting and Preserving Your Wealth.