Back in the good old days, before the crisis of 2008-09, many experts suggested that all you needed to do was withdraw 4 percent per year, adjusted for inflation, from your nest egg. That strategy, experts said, was a near-guarantee that your nest egg would last a lifetime.
Well, go tell that to the guy selling apples and pencils on the street corner.
Yes, conventional wisdom has proven to be more conventional than wise. And now everyone is trying to figure out the best way to turn a nest egg into an income stream that will last throughout retirement. And that includes AARP, which this week released two tip sheets that "challenge conventional thinking and offer general guidance about how to make the best decision for you and your circumstances."
One of the tip sheets, "Making Your Nest Egg Last a Lifetime," which was written by Anthony Webb of the Center for Retirement Research at Boston College, suggests the following:
1. Delay claiming Social Security
Retirees and would-be retirees need to consider matching their fixed and best-case, inflation-adjusted sources of income against their fixed expenses. And one way to create the best inflation-adjusted source of income at the moment is to delay taking Social Security for as long as possible, certainly at least until your full retirement age if not longer, said Janet McCubbin, director of financial security at AARP's Public Policy Institute.
2. Consider purchasing an annuity
It's not right for everyone, said McCubbin. But for those who are retiring with a large nest egg and who don't have enough fixed and guaranteed sources of income to match their fixed expenses, an annuity might fit the bill. In essence, you want a fixed and dependable stream of income that covers your basic living expenses, she said.
3. Pay down your mortgage
Many would-be retirees should enter retirement debt-free, owning their home free and clear, according to McCubbin. Unfortunately, many would-be retirees pay little attention to their homes as an integral part of their retirement-income planning process. In fact, most people age in place until they become sick or a spouse dies and then they decide to sell their home, according to AARP.
Instead, homeowners should analyze far in advance their living arrangements and whether they want to have a mortgage in retirement.
4. Allocate your assets wisely
Many retirees place large portions of their nest eggs in investments that provide a guaranteed return on capital. According to conventional wisdom, retirees should rebalance their nest eggs in favor of bonds as they age. But AARP's view is that retirees should build portfolios that are broadly diversified and based on one's tolerance for risk.
5. Withdraw funds carefully
And that brings us back to the place we began. Conventional wisdom suggests that you should withdraw no more than 4 percent of your savings during retirement. But now, at least according to AARP, retirees need to be a bit more thoughtful and flexible about this.
"In tough economic times, you may want to withdraw a smaller percentage of your savings, if possible," AARP said.