Making Your Nest Egg Last As Long As You Do

Afraid you will spend your golden years working under the Golden Arches? You're not alone. Many people who are on the brink of retirement experience a host of fears associated with losing the ultimate security blanket: a regular paycheck. Chief among these fears is that you'll outlive your money, inflation will deplete your nest egg, a bad investment will sink your savings, or you'll get waylaid by a catastrophic illness.

Such anxiety can undermine the leisure you've anticipated so long. "If you don't enjoy the money you've saved for retirement, you're no better off than the person who never saved," says Norman Chiodras, a financial planner in Oak Brook, Ill. By figuring out how much you'll need before you retire, you can prepare for any frightening eventualities without going through the late-night sweats.

The good news is that people are living longer, healthier lives. But if you stick around longer than you planned to, you don't want to be forced to switch from filet mignon to Nine Lives. "Most people today have enough money to retire and live until their mid-70s," says Nadine Gordon Lee, a personal finance adviser at Ernst & Young. "It's that extra 10 years that seem to be a problem." So, if you quit working at 65, you need to plan on providing for yourself for 20 more years or so.

Step one is to determine how much you currently spend to maintain your lifestyle. Using checkbooks, ATM statements, and credit cards, examine how you spent last year's income. Or look at your income and subtract what you've saved, taxes paid, and any unusual items, such as car repairs or home improvement, says Lee--and "the rest went to your lifestyle." Figure on some expenses disappearing if you pay off your mortgage or finish bankrolling your children's education. But other costs are likely to crop up, especially in the early years, when you finally take that European tour or start that kitchen remodeling you've been putting off.

Next, calculate all of your sources of income. These fall into three categories: Social Security, pension benefits, and personal savings. You can get a personalized estimate of your Social Security benefits from the Social Security Administration (800 772-1213) and your estimated pension income from your company's personnel department. Ask what you would receive if you retired at the ages of 55, 60, and 65.

Now, you have a rough idea of what you have to retire on. But how do you make that last? Visit a financial planner or buy a retirement- or financial-planning computer program that lets you play with the numbers. Some good software picks include Quicken Financial Planner, Price Waterhouse Retirement Planning, and Rich & Retired from Datatech Software in Harrisburg, Pa. A good planner will use a similar program to do the computing for you--and discuss your doubts and fears. Either way, you need to plug in the variables: income, expenses, retirement age, mortality, inflation rate, return on investments, and whatever special needs you have.

If you discover a shortfall between what you need to retire comfortably and what you've saved, there are ways to bridge the gap. You can work longer, shoulder a little more investment risk, slightly lower your income requirements--or combine all three. "I usually start with how far we are from meeting their goals if we did nothing," says Ernst & Young's Lee, "and then find the least objectionable thing to close the gap." For example, if you can't stand your job, maybe the solution is retiring early and living low on the hog for a few years.

Part of making the money last is beating back the bogeyman, inflation. Over time, your pension won't change, and Social Security may not remain indexed for inflation in the future. Over the past 30 years, inflation has averaged 5%, so that's a good starting point for trying different scenarios. Plug in the numbers to make sure your rate of return will beat inflation by at least 2% to 4%.

The No.1 defense against inflation is investing in the equity markets, says Lee, "because, historically, long-term yields on equities have given the highest return." Stocks average some 10% a year, vs. 5% for bonds. "Unfortunately, as people get older they get more conservative and are not willing to invest in stocks," says Steven Levey, a Denver-based certified public accountant. Retirees "should have 25% or more in the market."

Taking on risk at this late stage of the game is a scary prospect. But there are ways to insulate yourself from market swings. First, figure out if you can afford the luxury of guaranteed investments. If you have enough to live off returns from Treasuries and certificates of deposit for a few decades, by all means do so. The only reason for you to take on risk is to benefit or support your heirs.

However, if fixed income won't get you where you want to go, you can stay ahead by dividing your investments between guaranteed securities for near-term income and equities for long-term growth. "It's vital that people invest a portion of money in guaranteed investments so they know their lifestyle is not eoing to change," says Chiodras. "If you put all your money into something that will fluctuate in value, your lifestyle will fluctuate, too."

One of his clients did just that--plunging an $800,000 lump-sum pension withdrawal into bonds and utilities in early 1993, just before those markets crashed. The client felt devastated by his $120,000 loss. To help him recover, financially and emotionally, Chiodras told him to put half his money into guaranteed annuities and Treasuries and half into no-load growth funds. That way, while he is living off the guaranteed investments, the other portion is growing to take its place down the line.

Having negotiated between the Scylla and Charybdis of inflation and market volatility, what's left is to hope you die a quick and painless death. A lingering illness or stroke could consume your carefully cultivated savings in nursing-home and hospital costs. While the very wealthy can afford medical help and the poor are eligible for government aid, "it's the middle class that's out there half-naked," says Lee. One alternative is to begin an orderly estate-planning process well in advance of a debilitating illness, gradually decreasing the assets in your name. Then, if you have to enter a nursing home, you won't have to eat through all of your assets before becoming eligible for Medicaid. Elder-care lawyers specialize in helping clients divest assets that could wind up paying for a nursing home. "Most Medicaid-type planning does not start until there's a serious illness. By then, it's too late," says Lee. "Most people just hold their breath and hope it won't happen."

PREMIUM PLAN. Probably the best way to breathe easier--if you can afford it--is to buy some form of long-term-care insurance, which ranges from about $900 a year at age 50 to $2,800 at 70. Some guides to finding long-term care include Beat the Nursing Home Trap from NOLO Press/Folk Law Inc. (800 992-6656) and A Shoppers Guide to Long-Term Care Insurance from the National Association of Insurance Commissioners in Kansas City, Mo. (816 842-3600). You should also find out whether your company offers any extended health-care benefits to help span the gap between an early retirement and Medicare eligibility at age 65. Some employers offer discounted group long-term-care programs for retirees.

Fear of the unknown is really the biggest fear expressed by those facing retirement. And though you can't predict any of the variables with certainty, the more you know about what you'll have, the less you'll have to fear. Ironically, it's planning for the worst that will end up giving you the best your retirement years have to offer.

Before it's here, it's on the Bloomberg Terminal.