How to Make Retirement Investments Last—and Find Peace

Most people work 40 years or more to accumulate assets for retirement. Then, if they use the assets too fast, they may end in poverty. How fast is too fast? The answer must balance withdrawals and longevity against investment growth, yet it need not be overly complex. It is entirely possible for many retirees to self-manage their investments if they organize an initial approach into a few basic steps. Over time, retirees can learn to refine and augment the basic approach outlined here.

Understanding the Dynamics of Conventional Retirement Planning

Writers and analysts often assume retirees want a steady income through a 30-year retirement. A steady income is easily modeled and reflects a popular image of retirement as a period of calm. A thirty-year period after age 65 will see most retirees tucked safely in the ground.

That quiet, long retirement is then pitted against the rough and tumble of a volatile investment arena.

Most investments experience uneven growth. Some years a portfolio will expand and some it may contract. Looking at the total returns for the Standard & Poor’s 500 stock index from 1988 through 2011, readers can find five years of negative returns and 19 years of positive returns. The greatest negative return was in 2008 (-37.00%), and the largest positive return was in 1997 (+33.36%).

Bonds fluctuate also. Since 1976, bonds had their highest annual return in 1982 (+32.60%), and their lowest in 1994 (-2.92%), which was one of only two years of negative returns.

What is a retiree to do?

The Range of Withdrawal Options

Retirees may (1) buy annuities or (2) personally manage their investments. Typical annuities are contracts with insurance companies providing monthly income for as long as the retiree lives. In a simple case, a retiree may pay $200,000, then depending on the retiree’s age and other characteristics, he may receive about $1,100 per month for life.

Most retirees don’t buy annuities. One 2007 survey reported that only 6.5% of retirees intend to buy an annuity but that 12.1% of recent retirees had actually purchased one.* Still, that means about 88% of retirees are self-managing their retirement accounts, perhaps with the help of advisors.

Self-management need not be complex, but anyone who intends to do it should grow familiar with basic investment concepts including risk, asset allocation, diversification, and rebalancing. In subsequent blog posts, I will show how these concepts fit together into a program designed for self-management. For now, however, the important concept is rebalancing.

Investment research has shown that a portfolio performs better when it is kept to predetermined ratios between components. The example portfolio discussed here is stipulated to have 50% stocks and 50% bonds. As stocks and bonds fluctuate, the portfolio balance will change. Rebalancing involves selling either stocks or bonds and buying the other to preserve the desired balance.

For example, if stocks lose 5% and bonds grow 3% in one year, then a portfolio that has $100,000 of each at the beginning will end with $95,000 in stocks and $103,000 in bonds, or a total of $198,000. In this example, rebalancing involves selling bonds and buying stocks until the 50/50 balance is restored. The retiree would sell $4,000 worth of bonds and buy $4,000 worth of stocks, giving $99,000 of each. A rebalancing schedule need not be frequent, and many advisors would probably agree that once each year is adequate.

Six Simple Steps

There are six steps in this simple approach to managing your investments:

  1. Determine the base amount of the portfolio that will be used for retirement income. It may be all or it may be only a part, leaving some for emergencies.
  2. Compute 4% of the base amount to set the annual withdrawal.
  3. Given a balanced portfolio, a retiree will liquidate $50 worth of stocks for every $50 worth of bonds. That preserves the balance between them. Place the money in a safe, interest-bearing account.
  4. Divide the annual amount by 12 to set a monthly withdrawal from the account.
  5. For one to three years, rebalance the portfolio at the same time each year, then repeat steps three and four. This insures the same fixed withdrawal each year.
  6. Study investment literature and practices. Consult an advisor. Perhaps join an investment group. Over time retirees can adjust their practice to better suit their growing knowledge.

A retiree with $200,000, balanced 50/50 between stocks and bonds, will liquidate $4,000 of each when he retires, place the total $8,000 in an account, then take out $667 every month for the first year. By itself, that is a meager monthly retirement income, but it looks better combined with Social Security and perhaps a pension.

Benefits of the Six Steps 

An initial 4%-withdrawal is commonly recommended. Burton Malkiel, in his classic book, “A Random Walk Down Wall Street,” recommends 4%. Vanguard, a well-known investment management company, suggests 3-5%. A 4% withdrawal is discussed as a commonly recommended strategy on The Bogleheads, an investment forum named after Jack Bogle, founder of Vanguard.

Most writers include an annual inflation adjustment with the 4% withdrawal. That has been deliberately abandoned here, replaced by the recommendation to reconsider investments and withdrawals as retirement moves forward.

In many cases, the self-management strategy recommended here will produce a gradually increasing retirement portfolio, leaving an estate at death. On average, a diversified portfolio grows faster than the recommended fixed withdrawals. Alternatively, a fixed annuity usually offers a larger monthly payout but leaves nothing for heirs.

The six-step approach is simple, safe, and adaptable over time. It is something many retirees can do themselves. It is a good foundation on which to build a modern and effective self-management program.


*Warshawsky, M. & Hill, T. “Who Prefers Annuities? Observations about Retirement Decisions.” Watson Wyatt Insider 18, no. 4 (April 2008): 12-21.

5 thoughts on “How to Make Retirement Investments Last—and Find Peace

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