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"How do I make sure I don't run out of money in retirement?"

It's a question lots of people ask when they're thinking about, or facing, retirement.  How do you ensure that your nest egg won't be gone before you are?

The idea of running out of money late in life, when your ability to do anything about it is all but gone, is a scary one to ponder. Fortunately, even if you're already retired, there are some things you can do to improve your chances of avoiding that fate.

No matter the size of your nest egg, have a plan to draw it down
Most folks -- at least those savvy enough to be reading the Fool -- eventually get serious about saving for retirement. If you started early and were able to sock away several million dollars, you're probably not too worried about blowing through it all. You probably have enough money (and enough self-discipline after all that saving) to ensure that you'll be set for the remainder of your life without too much worry.

But even for those people -- and for the many more who don't have millions stashed away -- a disciplined approach to drawing down your retirement nest egg makes sense. As the Fool's resident retirement guru, Robert Brokamp, notes in the new issue of the Rule Your Retirement newsletter, one of the most common recommendations is to withdraw 4% of your nest egg annually, adjusting it upward to keep pace with inflation.

It's a common recommendation, but does it really work?

A simple plan, but don't get tripped up
Here's the short answer: It can, as long as you understand the assumptions it's based on and what it's intended to achieve. Many different studies have been done, and while recommendations vary, 4% is a rough average -- and a good place to start.

But that recommendation comes with a few assumptions:

  • A 30-year retirement. For most people retiring between ages 65 and 70, 30 years is a reasonable expectation. But if you're retiring early, or if your grandparents are still hale and hearty at age 112, you might want to consider a more conservative approach.
  • Mr. Market will cooperate. A protracted bear market, or an extended period of high income rates that crush bond returns, could make outliving your income a grim possibility. Most studies are based on a "market average" return that looks at the market's recent history; an extended period of returns below that average could be a problem.
  • Your fees are very low. This is a big one. Let's take a closer look.

Lots of people retire with their nest egg spread among several of the mutual funds from their longtime employer's 401(k). That's not necessarily bad: If your holdings are well-diversified and growing, you could do a lot worse.

But the fees on actively managed mutual funds can eat away at your savings. Look at Fidelity Contrafund (FCNTX), a great fund that is a mainstay growth option in many 401(k) plans. It has beaten the S&P 500 Index by a bit over the last three years, returning about 15.7% to the market's 14.9% through May 31. But investors have paid for that little bit of performance: Contrafund's expense ratio is 0.81%, versus the 0.17% that investors pay with Vanguard 500 Index Fund (VFINX).

"But I like the actively managed fund," you say. And I say yes, but Contrafund's size (around $56 billion) means that many of its biggest holdings are also among the biggest names in the S&P 500. The fund's manager, Will Danoff, believes strongly enough in Apple (Nasdaq: AAPL  ) , McDonald's (NYSE: MCD  ) , and Coca-Cola (NYSE: KO  ) to give them all prominent positions in the portfolio. They're all excellent companies  -- Apple's growth has been eye-popping, McDonald's is a great holding during tough times, and Coke is a cash-flow king -- but they're also all big positions in the S&P 500.

That's a key reason why Contrafund, which is managed by one of the best minds in the business, hasn't beaten the index by a bigger margin; by necessity, it's holding many of the same big stocks.

More ways to ensure that your nest egg lasts
This isn't to pick on Fidelity, whose fees are lower than those of many fund providers. It's to point out that seemingly small differences between fees matter -- and that no matter what funds you're holding now, low-fee index funds or ETFs may be the best way to go once you're in retirement.

"But what about annuities?" you ask. That's an excellent question, and for the answer I'll direct you to Robert's full article in the new issue of Rule Your Retirement, where he looks at the 4% strategy in detail -- and compares its pros and cons to those of two popular annuity approaches.

Rule Your Retirement is a paid service, but that's not a problem for you. You can get full access to Robert's article and all of this month's great content with an easy 30-day free trial. There's absolutely no obligation to subscribe. Just click here to get started now.

Fool contributor John Rosevear owns shares of Apple. The Motley Fool owns shares of Coca-Cola and Apple. Motley Fool newsletter services have recommended buying shares of Coca-Cola, McDonald's, and Apple, as well as creating a bull call spread position in Apple. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (10)

Comments from our Foolish Readers

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 June 08, 2012, at 8:22 AM, pondee619 wrote:


    Is Contrafunds out performance of the market NET of fees? " returning about 15.7% to the market's 14.9% through May 31"

    "Contrafund's expense ratio is 0.81%, versus the 0.17% that investors pay with Vanguard 500 Index Fund"

    What was the relevant return of the Vanguard 500 Index Fund? Was if the same as the "market's" cited above or something different? Since the average investor can't invest in the "market" wouldn't an apples to apples comparision be more instructive. Contrafund returned 15.7% through May 31. What was the return of the Vanguard 500 Index? Something we CAN invest in.


  • Report this Comment On June 08, 2012, at 2:25 PM, mikecart1 wrote:

    Make money last forever by finding something you really love to do no matter how much someone pays you and work part time. Working 3-4 days a week on your own schedule and getting paid is like free money when you are retired. Far better than sitting around and doing nothing and watching your savings go up in smoke from inflation. An older person can do many things like teach, arts & crafts, etc.

    If you ended your career making $80,000/year and you see that you only spend $30,000/year to live, find a job that you can make $15,000+/year doing on your own terms.

    Relying on market returns leaves you with no plan B.

  • Report this Comment On June 08, 2012, at 6:35 PM, 250Blue wrote:

    mikecart1, your idea is plan B.

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