How to Live off Your 401k without Going Broke
The biggest challenge most retirees are facing lately is how to draw down their retirement nest eggs without letting them run out. Here is a common sense approach that will protect your portfolio even during the worst of market environments.
Stick to your budget. Once you determine what your monthly expense needs are for 2010, stick to it. One big portfolio killer is drawing too much, especially during market downturns
Keep your withdrawals to 4-5%. Limiting your withdrawals to these percentages will give you the best chance at avoiding running out of money later in your retirement, and increasing your withdrawal every year to keep pace with inflation.
Diversify, Diversify, Diversify. Ensure that your portfolio is not only protected against a market decline, but also protected against the long term purchasing power erosion of inflation through diversification. A 50/50 split in your portfolio between both stocks and bonds will provide you with the return you need to outpace inflation and give you the protection against those major market skids.
Make sure that you diversify not only between stocks and bonds, but also among those asset classes. Your stock portion should contain small-cap stocks, large cap stocks (both growth and value) as well as international. As for bonds, most of the bond investments should be in guaranteed U.S. Treasuries, but a small percentage should be held in corporate bonds.
Don’t panic during down markets and don’t get greedy during great markets. Don’t get too caught up in what your portfolio has done in the last 6 months or year. Don’t panic and sell everything when the market heads south; this is a sure strategy to run out of money. Maintain your 50/50 balance. If you are so panicked you feel you have to do something, cut your living expenses to keep more money in the portfolio for when the turnaround comes . . . and it always comes. The day always follows the night.
Reevaluate and rebalance. Every year, reevaluate your portfolio and the holdings in it. Make sure that you are properly diversified and that the investments you originally chose are still appropriate for your age and risk tolerance.
It is vital to the long-term growth of your portfolio that you rebalance it every year. Rebalance means selling some of what has done well and purchasing some of what has done poorly. This ensures that you keep your stock to bond percentage at 50/50. This will also give you the freedom to buy low and sell high.