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Make your money last in retirement

You’ll sleep better knowing you have a plan to maximize your retirement income. These tips can help.


YOU’VE FINALLY TAKEN THE LEAP into retirement — or are seriously thinking about doing so. It’s a big step, and several financial questions probably loom large for you: Can I afford to live the life I want in retirement, and how much will I be able to safely spend every month? Most important: will I have enough money to last the rest of my life?


“There are a number of things retirees can do to control how long their money might last,” says Merrill Financial Advisor Eric Breemen. “As long as you’re prepared to stay somewhat flexible, you and your advisor can work together to create a customized plan that accounts for all of your priorities and adjust for any hurdles you may encounter along the way.” Here are four helpful rules of the road to follow as you explore all that retirement has to offer.


Make sure your spending rate is sustainable. While conventional wisdom often pegs the ideal annual spending rate for retirees at 4%, you should view that only as a starting point. After taking increasing longevity and other factors into account, your actual drawdown rate could range from 3% to 5%, depending on your age at retirement, how much you’ve saved, whether you have guaranteed sources of retirement income beyond Social Security, how much you hope to leave your heirs and what your health status is. Assuming a 4% spending rate, someone with $1,000,000 in savings, for example, would spend $40,000 the first year of retirement and increase that amount with inflation in subsequent years, notes Breemen.


“Your optimal spending rate is one of the first questions you’ll want to address,” he adds. Your advisor can show you how different spending rates could affect how long your money might last and help you periodically review your strategy and adjust it as needed to account for things like inflation or market downturns.

The headline of the chart reads: Is your withdrawal rate sustainable? The Y axis of the scatter chart reads “Total potential wealth” and shows 3 lines starting at $250,000. The X axis represents the year, starting with 1972. The first line, showing a 5% withdrawal rate, decreases to $0 after 21 years of spending. The second line, showing a 4% withdrawal rate, decreases to $0 after 38 years of spending. The third line, showing a 3% withdrawal rate, increases to $2million after $48+ years of spending. The source line reads: Calculations by the Merrill Chief Investment Office.

*Assumes a $250,000 investment ($1,691,000 adjusted for inflation in November, 2021) that at year end 1972 was allocated half to U.S. stocks (proxied by the S&P 500 Index) and half to U.S. bonds (1976–2020: ICE BofA U.S. Broad Market Index; 1973–1975: Ibbotson U.S. Intermediate Government Bond Index) and rebalanced annually.

Nevenka Vrdoljak headshot“Some investors tend to play it too safe as they begin retirement.”

— Nevenka Vrdoljak, director, Chief Investment Office, Merrill and Bank of America Private Bank

And there’s another factor you may not have considered: gender. According to Nevenka Vrdoljak, a director for the Chief Investment Office, Merrill and Bank of America Private Bank, women may want to stick closer to the lower end of the 3% to 5% withdrawal range to maximize their income because they tend to live longer than men. If it’s looking like your income won’t be quite enough to support the retirement you’ve envisioned, says Vrdoljak, you might consider delaying claiming Social Security, adjusting your spending rate or working longer to bring in more income.


Let your investments work a little harder for you. “Some investors tend to play it too safe as they begin retirement,” says Vrdoljak. Taking the cautious path often means putting money in lower-risk — but also lower-yielding — investments such as bonds, CDs, money market funds and Treasury bills. “But over a retirement of 30 or more years, a portfolio that's all cash and bonds can barely keep up with inflation or the likelihood of rising health costs,” says Anil Suri, a managing director for the Chief Investment Office, Merrill and Bank of America Private Bank.

The headline of the chart reads: How likely is it that a 65 year-old woman will have enough to last her lifetime — based on how she invests? The bar chart shows 5 bars representing portfolios: All Cash (37%), 50% Bonds/50% Cash (70%), All Bonds (75%), 50% Stocks/50% Bonds (94%), 100% Stocks (89%). The source line reads: Analysis by the Merrill Chief Investment Office, April 2021

**Assumes that a 65-year-old woman spends 4% of her wealth the first year of retirement and increases this spending in line with inflation in subsequent years. These withdrawals are taken at the end of each year, at which time the portfolio is rebalanced.

Anil Suri  headshot “Over a retirement of 30 or more years, a portfolio that's all cash and bonds can barely keep up with inflation or the likelihood of rising health costs.”

— Anil Suri, managing director, Chief Investment Office, Merrill and Bank of America Private Bank

If the stock market’s potential for volatility is what’s causing you to invest defensively, Breemen sometimes advises creating a “liquidity bucket” that puts several years’ worth of desired annual spending into cash, high-interest savings accounts, money market accounts and other liquid investments. The rest can be invested in a mix of stocks and bonds that could offer the potential for greater growth. “A liquidity bucket is a psychological safety net,” he notes. “You know you have that money to fall back on no matter what happens.” It can also serve as a cushion in the event you encounter an unexpected expense (you suddenly need a new car) or want to put a chunk of cash toward a specific goal (say, finally renovating your kitchen).


Inflation is another risk to consider when investing in retirement. That’s because, over time, rising prices can significantly reduce your spending power on a fixed income. Even a hike as small as 2% in inflation can have a sizable impact, whittling the buying power of a $1 million cash account down to $603,465 over 25 years.1 To hedge against the possibility that it could erode your spending power, consider adding assets, such as commodities, gold, real estate investment trusts, or owning real estate as an investment, that often keep pace with inflation, suggests Breemen. “Rental property is a very natural hedge against inflation. As inflation goes up, so does the rent.” Read “Inflation – One of Retirement’s Biggest Risks – Is Back” for more ideas to help manage its impact.


Don’t forget to plan ahead for long-term care costs. Half of today’s retirees will reach age 92 and another 25% will see 97 — and life expectancy goes up about a year with every decade.2 As we live longer, healthcare tends to take up more of our retirement budget. About 70% of those over the age of 65 today will need some form of long-term care in their lifetimes, according to the U.S. Department of Health and Human Services.


If you don’t already have traditional long-term care insurance — or, alternately, hybrid or permanent life insurance with a long-term care rider — you’ll want to earmark a certain percentage of your savings to help you cover future healthcare costs, says Breemen. “You could place those assets in a separate investment account designated for your future care,” he adds. Your advisor can help you estimate potential future costs, explain what Medicare does and doesn’t cover, share information about long-term care insurance options and talk you through various strategies to help close the gap.


Stick with your plan and review it regularly. “This may be the most important advice of all,” says Suri. It’s always tempting to blow up your spending plan for something you’ve suddenly decided you really want — say, a more luxurious car or a vacation home. Similarly, it’s sometimes easy to get spooked by turbulent markets and make spur-of-the-moment investment decisions that might not support your long-term investment goals. “The key is to have a plan you’re comfortable with. That way, you’re more likely to stay the course.”


Check in regularly with your advisor to adjust for any changes — both in the markets and in your life — so that your investments can continue working toward your financial well-being, now and in the future. “These are evergreen principles,” says Suri. “They have stood the test of time.”


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1 Calculated using Inflation Calculator, November 2021

2 Bank of America Chief Investment Office; calculations based on Society of Actuaries individual mortality tables


*It is not possible to invest directly in these unmanaged indexes. Returns are net annual fees of 1.3%. Annual spending as a percentage of the portfolio for the first year is as indicated in the figure and rises in subsequent years with inflation (CPI-U). Withdrawals are taken at the end of each year. These hypothetical results are for illustrative purposes only and are not meant to represent the past or future performance of any specific investment vehicle. Investment return and principal value will fluctuate, and, when redeemed, the investments may be worth more or less than their original cost. Past performance is no guarantee of future results.


**Planning horizon assumptions source: IRS single life expectancy table + 5 years (Table I in Appendix B in Publication 590-B at (page 46)). Time horizon is measured in years. Risk and expected returns assumptions for stocks, bonds and cash are as given in Table 2. These hypothetical results are for illustrative purposes only and are not meant to represent the past or future performance of any specific investment vehicle. Investment return and principal value will fluctuate, and, when redeemed, the investments may be worth more or less than their original cost. Past performance is no guarantee of future results.


The Chief Investment Office (CIO) provides thought leadership on wealth management, investment strategy and global markets; portfolio management solutions; due diligence; and solutions oversight and data analytics. CIO viewpoints are developed for Bank of America Private Bank, a division of Bank of America, N.A., (“Bank of America”) and Merrill Lynch, Pierce, Fenner & Smith Incorporated (“MLPF&S” or “Merrill”), a registered broker-dealer, registered investment adviser and a wholly owned subsidiary of Bank of America Corporation (“BofA Corp.”).  This information should not be construed as investment advice and is subject to change. It is provided for informational purposes only and is not intended to be either a specific offer by Bank of America, Merrill or any affiliate to sell or provide, or a specific invitation for a consumer to apply for, any particular retail financial product or service that may be available.


Investments have varying degrees of risk. Bonds are subject to interest rate, inflation and credit risks. Treasury bills are less volatile than longer-term fixed income securities and are guaranteed as to timely payment of principal and interest by the U.S. government. Investments in real estate securities can be subject to fluctuations in the value of the underlying properties, the effect of economic conditions on real estate values, changes in interest rates, and risk related to renting properties, such as rental defaults. There are special risks associated with an investment in commodities, including market price fluctuations, regulatory changes, interest rate changes, credit risk, economic changes and the impact of adverse political or financial factors.


This material does not take into account a client’s particular investment objectives, financial situations, or needs and is not intended as a recommendation, offer, or solicitation for the purchase or sale of any security or investment strategy. Merrill offers a broad range of brokerage, investment advisory (including planning) and other services. There are important differences between brokerage and investment advisory services, including the type of advice and assistance provided, the fees charged, and the rights and obligations of the parties. It is important to understand the differences, particularly when determining which service or services to select.


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