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Baby boomers' next milestone: Retirement

"Today" financial editor Jean Chatzky advises how to wisely withdraw from your retirement savings without blowing through your nest egg.

At 59-1/2 years of age, baby boomers can begin to withdraw from their retirement savings. But taking too much or dipping into savings too quickly can have a big impact on the longevity of your funds. “Today” financial editor Jean Chatzky offers her advice on how to make your savings last well into your twilight years.
On July 1, the leading edge of the baby boomers — 250 million Americans born between 1946 and 1964 — turn 59-1/2. For as long as I can remember, that's been a big deal in marketing circles — with retailers and advertisers trying to come up with products and permutations that will appeal to this demographic, which makes up the largest segment of the U.S. population. But starting today, it's a big deal in financial circles as well. Why?  Because it means that an awful lot of people will be able to soon withdraw money from their retirement accounts without penalty. If you're one of them, it's a big deal for you as well. While magazines like Money and financial advisors across the country have, over the past few decades, expended a lot of energy telling you how to put money into your retirement accounts, there's been very little attention paid to the smart way to take it out. And just like you needed a strategy for racking it up, you need one to reverse the process.A Strategy for Turning 59-1/2:

Define the goal  The goal here is making your money last. There is an all-too-real possibility for many people in this country that they will outlive their money — that they'll blow through their retirement nest eggs well before passing into the great beyond. Even people who are aware of this risk tend to underestimate it. That's because we don't have a real understanding of life expectancy and how it works. When actuaries talk about the fact that a 65-year-old man has a life expectancy of another 20 years or so, that doesn't mean that all 65-year-old men should plan on their portfolios lasting until they're 85. Instead, what it means is that 20 years from now, about half of those 65-year-olds will be, say, no longer with us. But the other half will have a decent chance of making it to 90. A handful will even make it to 100.  When couples enter into the picture, the conversation gets really cumbersome! While a 65-year-old man has a 30 percent chance of living to age 90 and a 65-year-old woman has a 41 percent chance of living to age 90 (go girls!), the odds are nearly 60 percent that at least one member of a male-female couple both age 65 will live to an age around 90. All of which is to say that unless you have a really good reason to believe you're genetically programmed to live a short life, you had better expect that your assets will have to last 25 to 35 years after you retire. Inflation, too, makes us underestimate our retirement needs. Even at low rates of inflation, it's important to remember that, over time, rising costs will substantially reduce your purchasing power.  Limit your withdrawals
There are two keys to making your retirement nest egg last as long as possible: Asset allocation and limiting your withdrawals. The latter is more important. According to research from T. Rowe Price, if you keep your withdrawals to 4 percent of your portfolio's value each year, adjusted for inflation, you can be pretty sure that your money will live as long as you do.  You have to remember, though, that your balance is a moving target. If you take a hit in the market in a particular year, you have to reduce the withdrawal to compensate. There is a big difference between pulling out four percent and pulling out just slightly more, say, 5 percent. The difference is your ability to make your money last. 

Say you have $600,000 in savings and a life expectancy of 25 years. If you limit your withdrawals to four percent and put 60 percent of your money in stocks (with the rest in bonds or other more conservative vehicles), you have an 80 percent chance of making your money last.If you withdraw 5 percent annually, you would have only a 50 percent chance of making your money last that quarter decade, even if you took substantial risk and put 90 percent of your money in stocks.Work longer 
If 4 percent isn't enough to live comfortably, think about working — not forever, but for a few additional years. According to the American Savings Education Council, about a quarter of retirees are working after they officially retire, not only because their investments haven't met expectations, but also because their expenses are higher. A few extra years in the workforce gives your portfolio added time to grow and cuts the number of years you'll need to draw on that money. It also gives you a shot at hanging onto some valuable health care benefits (that's the number one expense retirees underanticipate.)Have a cushionOnce you do stop working, make sure to move two or three years of living expenses into a not-at-all-volatile money market fund or short term bond fund. That means if the market takes a tumble, you won't have to sell investments when they're down.

Jean Chatzky is the financial editor for “Today,” editor-at-large at Money magazine and the author of “Talking Money: Everything You Need to Know About Your Finances and Your Future.” Her latest book, "Pay It Down: From Debt to Wealth on $10 a Day," is now in bookstores. Copyright ©2005. For more information, go to her Web site, .