Last Updated: January 16, 2009
If you're about to retire or recently retired — whether by choice or not — odds are high that you're trying to figure out whether you'll have enough money to maintain your standard of living.
To be sure, you likely have many sources of income, including Social Security, your retirement accounts, your home, your insurance policies, even perhaps a part-time job. But what if you didn't save enough prior to retiring? What's the best way to maintain your standard of living, while making sure you don't outlive your assets?
According to Gordon B. Pye, Ph.D., a financial planner and author of a just-published article in the January 2009 issue of the Journal of Financial Planning, retirees can salvage their retirement by working part-time and annuitizing a portion of their portfolio.
Typically, if you retire with adequate savings, you can safely withdraw 4 percent from your investments per year and still maintain your standard of living. But the big problem occurs if you don't have adequate savings. You could either withdraw significantly more than four percent now and reduce your standard of living later. Or you can withdraw less than four percent now and reduce your standard of living now. Either solution leaves you in a bit of a bind — living below your standard of living now or later.
For his part, Pye recommends the solution that offers the least pain: Annuitize a large portion of your investment and seek part-time employment. In his article he cites, "that earning even a minimal amount from part-time work will reduce measurably the risk of a reduced standard of living, while earning the maximal amount from part-time work will reduce significantly the risk."
In addition, he wrote that "annuitizing 25 or 50 percent of your portfolio further significantly reduces risk of reducing your standard of living." According to Pye, there are costs to this strategy. "But those who have not saved enough for retirement must expect to pay a penalty," he wrote. "This strategy appears to offer the least onerous penalty."