How can you make your money last during retirement?

FALLBROOK – It's probably safe to say that many people are concerned about having enough money to cover their retirement years. In fact, some surveys have shown that people are more frightened of running out of money than they are of dying. What can someone do to help alleviate these fears?

Their first move is to create a retirement income strategy, and they'll want to develop it well before they need to use it. While there are many ways to develop such a strategy, consider these three key elements:

Withdrawal rate

The withdrawal rate is the percentage of a portfolio that is used every year during retirement. So, for example, if a person retires with a portfolio worth $1 million, and they choose a 4% withdrawal rate, they'll be taking out $40,000 per year. The withdrawal rate will depend on several factors – their age at retirement, the size of the portfolio, potential earned income, date at which they start taking Social Security and so on. Clearly, when deciding on a withdrawal rate, reach the "Goldilocks" solution – not too much, not too little but just the right amount.

Reliance rate

The reliance rate is essentially the percentage of the overall retirement income that comes from the investment portfolio – an individual retirement account, 401(k) and other accounts. It's called a reliance rate because a retiree relies on this portfolio for their income. The higher the reliance rate, the more they will rely on their portfolio to provide income during their retirement and the greater their sensitivity to market fluctuations.

Income sources

The more sources of lifetime income someone has – such as Social Security and a pension from their employer – the less they may be relying on their investment portfolio to cover their retirement goals. However, many private employers have moved away from pensions in favor of 401(k)-type plans, and Social Security will only provide about 40% of their preretirement income in retirement, assuming their earned income is average for U.S. workers, according to the Social Security Administration. Consequently, a retiree may want to consider options such as annuities, which can provide lifetime income benefits.

It will take careful planning to put these three factors together in a way that can help people build enough consistent income to last throughout their retirement – which could easily extend two or three decades. And there's no single formula for everyone. For example, while an annuity could offer lifetime cash flow and help them reduce their reliance on their investment portfolio, it also involves fees and expenses, plus lower liquidity than other sources of income, so it may not be right for everyone.

Fortunately, people don't have to go it alone when taking all their retirement income factors into account. They may want to work with a financial professional – someone who can evaluate individual situations and recommend retirement income solutions based on the appropriate reliance rate, withdrawal rate and potential income sources. By getting any needed help and by following a suitable long-term strategy, retirees can ease some of the stress that comes from wondering if their life span might eventually exceed their financial resources.

Edward Jones financial adviser Brian Schrock is located at 1434 S. Mission Road, Suite B, in Fallbrook. For more information, call (760) 731-3234.

This article was written by Edward Jones for use by your local Edward Jones Financial Advisor.