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How to reduce the risk of outliving your money

So you've been saving diligently for your Golden Years and are nearing the day you'll join the ranks of retirees. The question is, How do you make sure that hard-earned pot of money lasts?

The answer isn't simple. With the possibility of living another 25 or 30 years after retiring, ensuring you don't outlive your nest egg requires a lot of self-introspection and number-crunching.

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"Create a realistic picture of where you are and where you expect to be when you step out of work, and make a [retirement] plan that reflects that," said certified financial planner Peter Creedon, chief executive of Crystal Brook Advisors. "If you have a plan, you have a much better chance of succeeding."

For a couple of decades, the industry rule of thumb has been that a 4 percent annual withdrawal rate, adjusted yearly for inflation, provides the best chance of not outliving your savings.

While some experts question whether 4 percent should remain the standard, T. Rowe Price recently released research confirming it remains a reasonable withdrawal rate.

The study examined returns in a diversified portfolio of 60 percent stocks and 40 percent bonds over rolling 30-year periods starting in 1926. The results showed that an initial 4 percent withdrawal rate, adjusted for inflation, could be sustained for 30 years with a 90 percent chance of not outliving your savings.

Financial advisors say that, whether 4 percent should be an assumed safe withdrawal rate or not, a person's individual circumstances dictate how much they can afford to take out each year.

For some, that could be 1 percent or 2 percent; for others it could be much higher.

"But once you get above the 5 percent range, you need to start looking at whether it will be sustainable for the rest of your life," said Daniel Lash, a CFP with VLP Financial Advisors.

"If you're spending down your savings drastically to try increasing your Social Security benefits, you're shooting yourself in the foot." -Lauren Klein, partner with Woodhill Financial

To determine a rate appropriate for you, start by looking at all retirement income and expenses. On the income side, in addition to your retirement savings, is Social Security, which can affect the amount you need from your savings.

While you can choose to receive your Social Security benefits before your full retirement age (as defined by Uncle Sam), doing so results in lower monthly payments and possibly more reliance on your savings.

Conversely, delaying Social Security beyond full retirement age results in larger checks. But, caution advisors, waiting to take Social Security to let the amount continue increasing — it tops out at age 70 — won't make sense for all retirees.

"If you're spending down your savings drastically to try increasing your Social Security benefits, you're shooting yourself in the foot," said Lauren Klein, a CFP and partner with Woodhill Financial.

Depending on how your savings are invested, Klein explained, the portfolio's gains could end up being more valuable than a larger Social Security check.

If you're lucky enough to be expecting a pension — about one-fifth of private-sector employees still get them — or any other kind of constant income stream, that also should be factored into the withdrawal rate of your savings.

On the other side of the balance sheet are retirement expenses.

Advisors say that in addition to everyday costs such as groceries and utilities, retirees often embark on activities they lacked time for before, such as extended travel and hobbies that come with new costs. The need for a big-ticket item — say, a new car — also likely will crop up.

Additionally, one of the biggest variables to consider is your future health.

The pain of health costs

"The costs associated with health care are going up consistently, and it's likely to be your biggest expense," said Creedon of Crystal Brook Advisors. "Even if you're [healthy] today, you have to plan for the what-ifs."

Strategies for mitigating health-care costs might include a supplemental insurance policy and long-term care insurance. Long-term care — generally defined as services provided to people with chronic conditions that impede their ability to perform everyday tasks — can run into the thousands per month.

Advisors also caution against assuming you'll spend less in retirement.

"In general, it's difficult to not continue the same lifestyle you currently have," said Lash at VLP Financial Advisors.

Some costs might go down — commuting costs, housing expenses if you downsize — but everything else tends to remain the same.

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Also consider your legacy. If you want to leave money behind, it needs to be factored into your rate of withdrawal. Some retirees want to leave money for their children, others want to support charities, and still others couldn't care less whether they leave anything behind.

After identifying all income and expenses, you should factor in the anticipated growth rate of your investments.

For preretirees, Lash assumes up to a 7 percent rate of return. For current retirees it ranges from about 5 percent to 6 percent.

"Preretirees have a longer time horizon, so they can be more aggressive with their investments," Lash said. "They're still saving money versus pulling out money."

Another thing to keep in mind is that it is harder today to squeeze returns out of bonds, which historically have played a big role in retirees' portfolios to mitigate risk.

Stay flexible

Yields on the benchmark 10-year U.S. Treasury note are hovering around 1.5 percent, compared to the historical average of more than 6 percent. But annual yields have not hit above even 5 percent since 2006. At the same time, inflation has generally remained low. As of the end of May, it stood at 1 percent.

Of course, it's impossible to predict with certainty what will happen with inflation or interest rates — or, frankly, anything. That's why advisors emphasize the importance of being flexible with your retirement plan so you can adjust your withdrawal rate as necessary.

"It's important to review it regularly and update it as you move along," said Klein of Woodhill Financial. "It's a document in progress that you need to stay on top of, because not everything in life goes according to plan."

— By Sarah O'Brien, special to CNBC.com