Saving for retirement is challenging, no doubt. But if you want to know what's really tricky, consider spending that money in retirement.
Retirees in the past often relied on a simple rule for retirement income: Draw down 4 percent of your savings every year and you will be all set. But the retirement landscape has changed.
Low interest rates also complicate the picture for savers. A one-year certificate of deposit came with a yield of just 0.28 percent, on average, through most of September, according to Bankrate. That's hardly enough to generate much retirement income.
Then there is the changing nature of retirement saving itself. Many people retiring now are able to count on pension and Social Security payments for the bulk of their retirement income, with investment income the icing on the cake. An AARP Public Policy Institute analysis of Census Bureau data found that in 2012, median income from Social Security for those receiving it was $13,972, and median income from pensions and retirement savings was $12,000. For these people, drawdown decisions matter, but represent just a portion of retirement income.
But as more and more people retire without defined benefit plans, their own savings, often in 401(k) accounts, will be increasingly important — and investors' choices about how to use them will be more complex.
"You need to have the safety in terms of predictable income, and you need to have part of your portfolio in risk assets. You could be looking at 30 years" of retirement, said Dan Keady, senior director of financial planning at TIAA-CREF.
Some investment pros say the 4 percent rule, first broadly proposed by William Bengen, a former financial advisor, in 1994, can still apply, but differently.
"We talk about the 4 percent guideline as a starting point," said Judith Ward, a senior financial planner with T. Rowe Price.
Take longevity, for example. At T. Rowe Price, financial planners recommend that people planning for retirement assume that their money will have to last for 30 years, said Ward. Clearly, if retirement assets remain flat, a 4 percent drawdown will not last that long.
That's why Ward and others recommend that retirees use a 4 percent withdrawal rate as a loose target, but then adjust their drawdowns depending on market conditions. When markets are in a downturn, "great, tighten the belt," Ward said. Conversely, a strong market can enable retirees to draw down a bit more, since they will still be leaving plenty of savings in the portfolio.
"People need to every year come back and look what's going on," Ward said.
Another approach is to consider annuitizing some retirement savings. Annuities have gotten a bad rap at times for high fees and opaque terms, but as Americans live longer, more experts are pointing to them as tools to help your money last.
"An annuity is really like an additional pension for some people," said Keady, adding that it "adds some stability to where you are getting your income."
In addition to providing more stable income, annuities help offset the risk that investors will outlive their assets. And having an annuity that throws off income reduces the chance that retirees will have to draw on invested savings at a time when the market is weak.
"Most people don't want to be paying for basic, necessary expenses out of something that gyrates up and down," Keady said.
One annuity option to consider is longevity annuities, which start paying out at some date in the future, like when an investor turns 80. The investor spends less for the annuity because of the delay, but receives protection against outliving savings.
Last year, the Internal Revenue Service added an incentive to consider longevity annuities: Money that goes into those contracts is not counted when the government calculates the minimum required distribution of your retirement savings.
Whatever you do, it's wise to start considering these questions sooner rather than later. Advice on saving for retirement is a lot more abundant than advice on how to draw down the money you salt away.
The good news, said Ward, is that that is starting to change. For financial experts, "I think its going to become much more the focus as the baby boomers start to retire in greater numbers," she said.
Even if you don't develop a full plan, thinking about the income you will have in retirement can encourage you to focus harder on saving.
"[People] begin not thinking about the nest egg, but they begin thinking about the income that can be produced from that nest egg," Keady said. "All of a sudden, people realize, 'Wait a second, I actually have to replace a paycheck.' "