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Will You Outlive Your Money?

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Right now, most older investors probably feel like they've survived a near-death experience. Yet despite the fact that retirement portfolios have recovered much of their losses from 2008, if you're in or nearing retirement, you still have to be diligent about making sure you'll have enough money to last throughout your golden years. By making the right financial moves, you can make your money last a lot longer.

In this month's brand-new issue of the Fool's Rule Your Retirement newsletter -- which you can read hot off the digital press today at 4 p.m. EST -- Foolish retirement expert Robert Brokamp talks about the biggest concern facing retirees and near-retirees today: whether they'll run out of money. As Robert sees it, there are many different risks that older investors have to face. But by managing those risks, you can enjoy a comfortable retirement.

Soaring after the crash
This time last year, those close to retirement were in a panic. According to statistics from the Employee Benefit Research Institute, long-tenured workers who were age 55 to 64 had seen their 401(k) balances shrink 20% or more on average from December 2007 to January 2009. That translated into hundreds of thousands of dollars in losses for many retired investors, most of whom had few ways to restore their lost wealth by going back to work.

Now, though, the tide has turned. More recent EBRI statistics show that those same investors have seen gains of 23% to 34% on average since the beginning of 2009. In other words, the rally rescued many retirees -- if they stuck with their investing plans and didn't jump ship at the worst possible moment.

Even after the rally, though, there are still many risks out there for retirees. The toughest thing about saving for retirement, of course, is not knowing exactly how much money you'll actually end up needing. If you spend more or live longer than you expect, then you might not have enough saved up. If you make investment mistakes, they can cost you much-needed cash at exactly the wrong time.

Perhaps the biggest risk retirees face is inflation. It may not be a factor right now, but with retirees needing to make their money last 30 years or more, it definitely will be at some point.

Handling inflation risk
In the latest issue of Rule Your Retirement, Brokamp points out that the worst times for retired investors weren't the Great Depression or the 1987 stock market crash. Rather, retirement nest eggs faced the greatest threat during periods of high inflation, as we saw during World War II and the 1970s.

In order to address the threat of inflation, Robert suggests a two-pronged approach. First, he urges that retirees build an inflation adjustment into their cash-flow strategy. Robert's recommended 4% withdrawal rate may seem low, but it incorporates an annual inflation adjustment that helps retirees keep up with rising costs over time.

Second, you need to choose investments that will help you fight inflation. During the 1970s, for instance, energy stocks like ExxonMobil (NYSE: XOM  ) , Chevron (NYSE: CVX  ) , and Marathon Oil (NYSE: MRO  ) saw their fortunes rise with soaring oil prices. With many big oil stocks paying nice dividends, they can actually do double-duty in a retirement portfolio by not only countering higher prices but also providing dependable income.

More generally, stocks of companies that can pass on any higher costs for raw materials to consumers do a lot better during inflationary periods than those that don't have much pricing power. That's one reason why refiners like Valero Energy (NYSE: VLO  ) and Frontier Oil (NYSE: FTO  ) suffered when oil was at its highs -- the market prices for refined products like gasoline were out of their control. In contrast, strong brands like PepsiCo (NYSE: PEP  ) and Kraft Foods (NYSE: KFT  ) are in a better position to hike prices and reap the benefits of inflation.

Mixed with an allocation to inflation-indexed Treasuries, the right stocks can help you defeat the inflation monster. You can't prevent inflation, but by preparing for it, you'll make sure it can't hurt you.

Keep on living
Robert goes on to talk about the other risks retirees face and how you can handle them too. To read the whole article, just take a look at the newest issue of Rule Your Retirement. Subscribers get full access to past issues, online resources, and much more -- and a 30-day trial subscription costs absolutely nothing. Try it out today and start getting your nest egg in shape to last a lifetime.

Fool contributor Dan Caplinger just wants to outlive the reality TV craze. He doesn't own shares of the companies mentioned in this article. PepsiCo is a Motley Fool Income Investor selection. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy is going to outlive us all.


Read/Post Comments (2) | Recommend This Article (13)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 05, 2010, at 11:30 PM, xetn wrote:

    I just hope to outlive the warfare/welfare state. That would protect my nest egg more than anything else.

  • Report this Comment On February 11, 2010, at 10:29 AM, GripColt wrote:

    Isn't an annuity the best way to avoid outliving money ?

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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