Will You Outlive Your Money?

If you ever want to retire, one question is probably looming large in your mind: How much money do I need to get there? Save too little, and you run the risk of ending up short on cash when you need it the most. Save too much, and you've essentially worked longer than you really needed. The ultimate retirement plan is one that lets you live comfortably for the rest of your life, while letting you retire while you're still young enough to enjoy your freedom.

Unfortunately, it's impossible to find a precise dollar amount that will let you retire early, enjoy a financially comfortable retirement, then die broke. Your actual needs will depend heavily on factors that you cannot accurately project -- such as exactly how long you'll live and how well your health will hold. Fortunately, however, there are very solid guidelines that can help you improve your odds of retiring well.

Your remaining life
The biggest question mark, of course, is how long you're going to live. While the very fortunate few may make it to 122, most of us are likely to pass from this world well before then. Ultimately, it's an educated guess, but a good place to start is this life expectancy table, published by the IRS. Find the age you expect to retire, then look across to find how much longer you'll be expected to live once you're retired, assuming you're an average person.

Even then, it's still all just based on a statistical average, not a road map of your specific future. Your general health, your family history, accidents, and other factors outside of your control may radically change how long you in particular will live. Additionally, advances in health care and nutrition mean that more of us have a chance to see our 90s and beyond than ever before. While a life expectancy table is a good guess at "what's reasonable," it can't reveal what will happen to you specifically.

Risks of living longer
What the table does say, though, is that the average 70-year-old is expected to live another 17 years. If you're in reasonable health and concerned about making sure your money will last as long as you do, though, you might want to add a few years to that when designing your own future. It's not out of the question for a 70-year-old to plan for another 22 to 27 years.

When you're looking that far into the future, inflation becomes a tremendous risk. According to the Bureau of Labor Statistics, inflation ran at 4.1% over the past year. If that keeps up for the next 25 years, $1 will only buy what about $0.37 buys today. In other words, what may now seem like a reasonably comfortable $40,000 annual retirement income will only be worth the equivalent of $14,650 per year.

Stocks for the septuagenarian
Inflation is a tremendous risk to people on a fixed income. As such, a retirement portfolio needs to not only deliver enough income to meet your needs today, but also enough growth to meet your needs in the next couple of decades. Over time spans measured in decades, history suggests that there is no better vehicle for that long-term growth than the stock market. Of course, there's still a place for traditionally conservative retiree investments like bonds, CDs, and money market funds. It's just that you simply cannot rely on those vehicles to provide the growth necessary for your portfolio to keep up with inflation.

For many retirees, a broad index fund like Vanguard's Total Stock Market Index (FUND:VTSMX) or broad exchange-traded funds like the SPDRs (AMEX:SPY) are decent choices. Their simplicity and instant diversification help many investors sleep at night. For those looking to personally manage their portfolios, not just any stock will do. Money-losing, bleeding-edge, speculative investments, for instance, are really only appropriate for investors who can afford to lose their money. For a retiree who's looking for enough growth to have a legitimate shot of outpacing inflation, without taking on excessive risk, appropriate companies to own tend to:

• Generally earn profits
• Pay decent dividends
• Raise those dividends in line with their business
• Be large enough to withstand ordinary economic cycles

The handful of companies in the table below certainly fit that bill. Each would certainly be worth considering as part of the diversified stock portion of a retiree's portfolio.

Live life to its fullest
Once you retire, I hope you find a very long, healthy, and fulfilling life ahead of you. To make the most out of your golden years, though, you need to have plans in place that assure your money lasts at least as long as you do. Since we're living longer, the old rules have changed. That's why my Foolish colleague Robert Brokamp offers Motley Fool Rule Your Retirement. With the tools, references, experts, and community of like-minded individuals he has assembled, you can design and live the retirement of your dreams. A 30-day free trial will get you started, and will cost you nothing but your time.

Fool contributor Chuck Saletta is looking forward to celebrating his children's great-great-grandmother's 103rd birthday with her this September. At the time of publication, Chuck had no direct ownership stake of any of the companies or funds mentioned in this article. Heinz is an Income Investor recommendation. Pfizer is an Inside Value recommendation. The Fool has a disclosure policy.