How To Open The Nest Egg

Retirees who have been carefully feeding their 401(k) and individual retirement accounts for years face a psychological hurdle when they have to switch gears and start withdrawing money. But nothing is as stress-inducing as actually figuring out how much to withdraw, when to pull it out, and which accounts to tap first. There are reams of research designed to provide guidance on those questions, as well as a few new products. Here's the latest on how to manage your nest egg, so it will be there as long as you are.

Be strategic about Social Security. If you are married, the lower earning partner (often the wife) can start her benefits when she turns 62, the earliest age allowed. The second spouse should defer benefits as long as possible. A worker who'd get $750 a month at age 62 would receive $1,320 if he waited until age 70 to start collecting, notes Boston College's Alicia Munnell, who recommends the strategy for couples who want to retire early. When either spouse dies, the other can continue receiving the higher benefit.

Hold the right investment in the right account. Fill those tax-deferred accounts with instruments like bonds and bond funds, real-estate funds and certificates of deposit, which are taxed at a higher rate than most investment income. Use your taxable accounts to hold stocks and stock funds; their gains and dividends are taxed at 15 percent or less. But watch this space: it's only a matter of time before the budget-crunched Congress starts tinkering with taxes, and these rates could change.

Plan for both sooner and later. The phases of retirement are often called the go-go years, the slow-go years, and the no-go years. In the earlier part of your retirement you'll be spending the most—traveling, pursuing expensive hobbies, fixing up the house. In the middle years, you'll slow down and spend the least. In the final years, your spending could increase again because of health-care costs. Spending more in the early years isn't so bad if you have an ace in the hole, like a house you can sell partway through your retirement, a solid long-term-care health policy, or an annuity that will pay you each month for life.

Use new products to boost your income. You can probably increase your withdrawal rates if you set aside some money in a low-cost immediate annuity that promises to pay you a set amount every month for life. That allows you to take a bit more risk with the rest of your portfolio. Additionally, some mutual-fund companies, such as Vanguard Investments and Fidelity Investments, have started new funds aimed at the spend-down crowd. They'll take your nest egg, invest it in a diversified portfolio, help you figure out how much you can afford to withdraw, and send you a check every month.

Keep some cash handy. Retirees should have five full years of living expenses in safe, liquid spots like money-market funds and bank certificates of deposit, says Tom McGuigan of Burns Advisory Group in Old Lyme, Conn. That way you won't be forced to sell shares of stocks and stock funds when the market is a mess. Like, ahem, now.

© 2008