A million dollars may sound like a lot of money - until you have to make it last for 30 years of retirement.
Figuring out how to stretch savings over a lifetime can be tough for many people once they stop working. The oldest baby boomers, who are hitting the big Six-0 this year, are just starting to learn this.
In fact, the leading edge of boomers can start dipping into their retirement funds as they cross the age 59 1/2 mark. That's when early withdrawal penalties for tax-deferred accounts, such as IRAs, disappear. The same goes for 401(k) plans for those who have stopped working.
But just because you can, it doesn't mean you should. Retirees often must balance having enough income to pay the bills with having a little fun, all while not chipping away too quickly at their nest eggs. Add increasing life spans, rising medical costs, volatile stock markets and unpredictable inflation, and many senior citizens don't know what to do.
Now, with the big birthday at hand, the problem no longer seems far off or theoretical.
"All of a sudden, they are saying, `Am I going to be able to make it or not?'" said Rosilyn Overton, a financial planner at Mid-Atlantic Securities.
Until recently, the concept of retirement savings dealt mainly with helping people sock away enough to live on after they stopped working. Now the focus is shifting to handling that stockpile of funds.
With that in mind, experts say there are steps retirees can take to help manage their savings and spending. What's more, a growing number of financial companies are catering to senior citizens as their ranks swell, offering them tools, services and products.
Baby boomers have more to worry about than people of their parents' generation, said Sanjiv Mirchandani, executive vice president at Fidelity Personal Investments, which offers free budgeting and withdrawal plans for clients and others.
For one thing, the boomers are living longer, so they'll have to plan correctly to ensure they and their spouses don't outlast their savings. At the same time, however, fewer can rely on traditional pensions that guaranteed income for life.
Steve Lowe, 66, retired in December 2004 after working at a travel agency and as an engineer at Northrop Grumman for 33 years. At this point he gets enough from Social Security and a pension that he plans to withdraw only 2 percent of his savings each year to cover his bills. But Lowe is worried that his expenses may escalate as he gets older and that he may have costly medical bills in the future.
"If I have to pull out 5 percent ... [my savings] would last me 20 to 25 years," said Lowe, who lives in Plainview, N.Y., with his wife, Jeanne, 64. "But I want to leave something to my children. And I'm concerned I might outlive my money."
To avoid exhausting their assets, one of the first things retirees should do is write down their income sources, necessary expenses and discretionary spending, said Jack Chite, a certified financial planner in Sayville, N.Y.
Money can flow in from pensions, annuities, dividends, interest and Social Security but must be spent on taxes, utilities, the mortgage, medical expenses and groceries. Then there are variable expenses, such as travel, golf, dining out and gifts to children and grandchildren.
When the figures are nailed down, you can see whether you have enough money coming in to cover your needs or whether you will have to dip into savings. If the latter is the case, you must either curtail your spending or make sure your nest egg produces enough income so you don't have to dip into the principal, experts say. Otherwise you may need to redefine "retirement" and get a part-time job.
So how much income can you reasonably expect your portfolio to generate, and how much can you take out? Most retirees can skim off about 4 percent from their investments every year, according to financial planners.
It's best to budget a percentage rather than a dollar amount so that if the account's value drops, you don't start invading the principal by taking out too much, said Ellen Rinaldi, head of retirement services at the Vanguard Group.
This strategy assumes that your account is earning more than 4 percent. To accomplish that, financial experts recommend keeping a portion of your portfolio in stocks, particularly dividend-paying stocks because they provide income and are often less volatile than other equities. Just as important, they provide growth for your nest egg.
"Even in retirement, you need to stay invested because you're going to live another 30 to 40 years," Rinaldi said. "That's something people forget."
Some seniors are loath to keep part of their money in stocks because they fear losing their savings in a bear market. But one of the most common mistakes retirees make is putting everything into bank accounts, bonds or other fixed-income securities, Overton said. The earnings usually cannot outpace inflation.