How to draw secured retirement income

Despite the fact that we all save and invest for our retirement most of us are not sure how long that money will last or if it will provide us the lifestyle we want for as long as we live?

According to Money Magazine, figuring out how to draw secure retirement income from a portfolio is a challenge in the best of times and today it's made more complicated by fear. Having seen the worst-case scenario unfold in the past year, you've probably gone into loss-avoidance mode. But deflecting market risk leaves you vulnerable to inflation risk -- and the risk that you'll outlive your money.

"There is not one single investment that can protect you from every risk you'll face," says John Ameriks, head of Vanguard Investment Counselling & Research. What you need, rather, is a basket of investments that provides stable income you're not likely to outlive; the potential for that income to grow to beat inflation; and the ability to access cash to meet unexpected needs and adequate protection from market downturns.

Money Magazine gives two strategies to achieve those goals. The first is traditional stock-and-bond portfolio. This strategy will work for you if you have enough income from social security and pensions to cover most of your basic expenses.

You invest in a diversified portfolio of stocks, bonds, and cash that has the potential to generate current income and capital gains. You pull out money as needed, starting off with a four per cent annual withdrawal, then increasing the dirham amount by the inflation rate each year. Done correctly, this gives you a 77 per cent shot of your money lasting 30 years, says Ibbotson Associates. The higher the withdrawal rate, the lower your odds. So this strategy may not work if you need more income than four per cent would provide.

For someone just entering retirement, a broadly diversified 50-50 stock-to-bond blend is a reasonable starting point. You also have to be flexible with withdrawals.

In a declining market you may have to skip the inflation boost or scale back the amount you draw down. Conversely, if the markets go on a run, you may be able to take more.

The second strategy includes stocks, bonds and an immediate annuity which is an insurance product that will send you fixed monthly checks for as long as you and/or your spouse live.

Do this if you need more income for basic expenses than you will get from social security and pensions or if you would like to avoid subjecting all your savings to market volatility.

Invest a portion of your savings in a lifetime immediate annuity, and manage the rest of your portfolio as in strategy one. The payoff: you will have another layer of guaranteed income and still have funds to tap.

This strategy provides longer income security than the first because the payout from an immediate annuity cannot be easily matched by another sure-bet investment.

One concern is that annuity payments are usually fixed, meaning they'll be worth less over time because of inflation. A few insurers offer inflation-adjusted immediate annuities.

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