Live Larger in Retirement

We all fantasize about retiring rich. We may spend decades working toward it -- saving, investing, and planning for a comfortable future. With a good plan, sustained effort, and a little luck, you'll arrive at retirement with a nice big nest egg.

But what do you do then?

Making ends meet
No, I'm not asking how you'll spend your time once you're retired -- I'm sure you've already got some ideas on that front. What I mean is this: How do you plan to pay yourself once you're retired?

The answer seems like it should be obvious, doesn't it? But when the time comes to actually start dipping into your retirement savings, it can be a puzzle. Should you move everything into CDs? Start selling stocks? And if you start selling, what do you sell first? What if you need to tap assets beyond your investment portfolio?

Clearly, it's not as simple as we'd like. While your portfolio will give you some growth and some income, what if that isn't enough? Here's a three-step method to help you figure out where -- and how -- to get the money you need.

Step 1: How much income can you generate?
Nope, this isn't a reference to a part-time job. It's about income-generating investments -- bonds, stocks that pay dividends, preferred stocks, and money market funds. If you've done a really good job of saving, income generated by the investments in your nest egg might be all you need to fund a comfortable retirement.

If so, and if leaving an inheritance for your kids (or a nest egg for a favorite charity) is a priority for you, you're in great shape. Choose a mix of bonds and stocks that will pay you a solid income while racking up capital appreciation and you're all set -- start planning that European trip.

But for the rest of us, that might not be enough. There's no denying that income-generating investments will still be an important component of our plan, whether we're drawing down the income or reinvesting for more growth. Personally, I'm a big fan of dividend-paying blue-chip stocks -- good ones like Colgate-Palmolive (NYSE: CL), Automatic Data Processing (NYSE: ADP), or H.J. Heinz (NYSE: HNZ) will pay you solid income while still giving you growth potential. But that income might not be enough to cover your cash-flow needs, so you'll also want a plan to get extra cash from your portfolio when you need it.

Step 2: Drawing down your portfolio
Lots of personal-finance pundits will tell you that the key to a successful retirement is to withdraw no more than 4% of your portfolio every year. That's good advice, but those same pundits often forget to tell you how to come up with that money, beyond some overly simplified rules of thumb.

In the September issue of Motley Fool Rule Your Retirement, which hits the virtual newsstand at 4 p.m. ET today, advisor Robert Brokamp examines this question. It turns out that it's a little more complicated than the old bromides you're used to hearing, such as "sell your losers" or "pare down your top performers."

In fact, the best answer turns out to be more about your approach to rebalancing than about rules of thumb. In short, how often you rebalance, and how you rebalance, has a lot to do with how much money you can withdraw -- and with how long your nest egg will last.

And while rebalancing isn't difficult, you can make managing your portfolio even easier. As the newsletter discusses in more depth, certain mutual funds -- low-cost, diversified, with a mix of growth and income potential -- actually eliminate the need to rebalance at all. When you need to draw down your portfolio, you simply withdraw some money from the fund. Rebalancing? That's the fund manager's problem.

But what if you can't get by on money from your portfolio, even withdrawing 4% of your holdings every year? Or what if you can "get by," but you'd like to live a little larger? Then it's time to look past your nest egg.

Step 3: Other sources of funds
Well, there's always that part-time job. But unless you're passionate about your work, or you've found a way to make money from a hobby (without making the hobby feel like a job), working during retirement should probably be a last resort. Instead, start thinking about tapping other assets. For most retirees, that means your house.

If you've put any thought into tapping your home equity in retirement, you've probably considered a reverse mortgage. Many experts tout the benefits of reverse mortgages, but they have a big downside -- your heirs have to pay off the mortgage when you die, which may entail selling your house. If passing on your house is important to you, you'll need to look at other ideas.

You'll find a good list of alternatives, along with the pros and cons of each, in this month's Rule Your Retirement newsletter. There's also a lot more, which you can see for free with a complimentary one-month guest pass. You'll have full access to today's new issue and dozens of back issues covering all sorts of retirement issues. You'll also be able to participate in a special members-only discussion board for your questions and ideas -- and have access to a unique set of planning tools to help you create your own plan for retirement. It's all yours for 30 days, with absolutely no obligation to subscribe.

© 2006 Universal Press Syndicate