The idea of running out of money in retirement is pretty terrifying. If your income evaporates late in your retirement, your options for replacing it will be limited. And even if you manage to do so, spending your golden years scrambling for money isn't exactly ideal.

A truly long-term portfolio

If you want investments that will keep on producing adequate income at least until your 100th birthday, you need to think long-term. The keys to a stable, lasting portfolio are diversification, smoothing out your income streams, and correctly balancing risk and return.

Diversification means choosing a wide variety of investments so at least one of your investments will flourish regardless of circumstances. At its highest level, diversification involves choosing investments from entirely different categories: stocks, bonds, real estate, commodities, annuities, and cash equivalents such as CDs. It's also important to diversify the investments within each category. For example, your bonds shouldn't all be treasury securities or (even worse) all issued by the same company. It's much better to have a wide range of bonds including treasury investments, high-grade corporate bonds, municipal bonds, and perhaps even a few junk bonds to bump up your yields.

Stack of gold bars

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Income from investments held in your retirement savings accounts typically comes in the form of dividends, interest, and gains from selling investments. Since selling an investment means that you'll get no further income from it, emphasizing dividends and interest in your retirement portfolio is the way to go; this will result in an ongoing income stream for you. To increase your dividends, focus on high-dividend-yield stocks with a long history of issuing those dividends like clockwork every quarter. The "Dividend Aristocrat" stocks are an excellent place to start looking. To increase your interest payments, build yourself a bond ladder -- you'll both reduce your risk and increase your return by using this approach.

Asset allocation is the key to balancing risk and return. The most important asset allocation decision for a retiree is correctly balancing your holdings of stocks and bonds. Stocks are far more volatile than bonds, yet produce a far higher return over time. Since you're taking a long-term approach here, clearly stocks are a critical component of your portfolio -- but if you go overboard with your stock investments, you could end up with serious short-term cash flow problems. One common approach for retirement asset allocation is to subtract your age from 110 and keep that percentage of your investments in stocks, with the remainder in bonds and cash equivalents. So if you're 80 years old, you'd have 30% of your holdings in stocks and 70% in bonds.

Managing your drawdowns

Choosing and maintaining the right investments is an important part of having a truly long-lived portfolio; correctly managing your withdrawals from said portfolio is equally important. Take too much out of your capital in any given year, and your portfolio might not be able to recover from the hit. Take too little, and you could end up living in unnecessarily poor conditions for a year.

As a rule of thumb, the older you get, the more you can safely take out of your retirement accounts. Assuming that you retire in your mid- to late 60s, your initial withdrawals should be conservative ones. It's also a good idea to partly base your withdrawal amount on how well your investments performed during the year. If you had average returns for the year (say around 7% to 8% returns on the stock portion of your portfolio), you'd be best off withdrawing no more than 3.5% of your total retirement account balance for the first few years. In a banner year, you can take a little more, perhaps as much as 4%. If your portfolio took a nosedive, consider withdrawing no more than 3%.

Once you hit age 70 1/2, your required minimum distributions (RMDs) kick in, and your choice of withdrawal rate will be somewhat taken out of your hands. One way to keep your RMDs on the small side is to have a substantial portion of your retirement savings in a Roth IRA; these accounts are not subject to RMDs. You'll still have the option to take more money out of your retirement savings if conditions warrant, but you won't be forced to do so.

Assuming that you aren't planning to save a substantial amount of your investments for your heirs, you can steadily increase your withdrawal rate from your retirement savings accounts as you age. In your 70s, consider bumping your rate up anywhere from half a percent to a percentage point above the rates you used in your 60s. For example, if your portfolio produced average returns, you might take 4% or even 4.5% instead of 3.5% that year. In your 80s, you can increase your withdrawals even more. Once you reach your 90s, you could draw down as much as 10% per year and still be assured of having funds until you hit 100. Hey, you can't take it with you -- so you might as well enjoy the fruits of your hard-earned labors.

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