It’s true: Fixed incomes just don’t cut it in retirement


The same thing has happened this year with our auto insurance, cable television and Internet service, medical insurance, homeowners association dues, electricity, water and sewer service and grocery bills.

They’ve all gone up, by 3 percent for the groceries to 29 percent for our medical insurance. We are paying more than we did last year for the same things, just as we paid more in 2005 than in 2004.

Conclusion: A fixed income doesn’t cut it in retirement when costs rise steadily. No wonder many retirees who cling to the old notion of never touching their principal struggle to live off their pension and Social Security benefits and the interest they earn from their savings.

This strategy may have worked decades ago when people died a few years after quitting work. But with many people living well into their 90s - and looking to spend 25, 30 or more years in retirement - we need a new approach.

Numerous books and articles have been written on ways to generate retirement income, and there is no need for us to add to this growing number.

What we want to do is emphasize key concepts common to all.

These concepts form the basis of a new mindset, a new way of looking at the question, “How can I make sure my money lasts for the rest of my life?”

The first concept involves changing the definition of income. To many retirees, income has meant only their Social Security checks or pensions, the interest a bank pays them or the dividends they receive from their investments. But income in today’s world also means any money they choose to withdraw from their savings or may earn from part-time work.

Next, we should understand that it’s quite all right and necessary, unless you are super-rich or your needs are very modest, to spend down principal through the years. But if you spend down too much too soon, you risk running out of money.

Therefore, you need a realistic estimate of how long you will live. Most of us underestimate our longevity. With today’s advances in medical care, there is a 50 percent chance that one of two spouses age 65 will live to age 92, and a 25 percent chance one will make it to 97.

You also need to decide how much, if anything, you want to leave to your heirs or to charity. Increasingly, surveys show aging boomers are not particularly interested in leaving large bequests, which fits with the fact many will need every penny they’ve saved for their retirement.

You can - and we think you should - adjust your spending from year to year, based on your means, needs and wants. If you enjoy strong investment returns one year, for example, you may afford to spend more the following year. If you suffer poor returns, you may need to tighten your belt.

We have chosen to spend more in the early years of retirement, when we are likely to be healthier, while making sure we have enough left both for ordinary expenses and expected higher medical costs later on.

But spending too much or suffering investment losses early in retirement can quickly deplete a nest egg. These early years can be the most dangerous financially, and it’s better to err on the side of caution.

You may consider covering some essential expenses, such as food and housing costs, with predictable streams of income such as lifetime pension or annuity payments, while covering discretionary expenses such as entertainment and travel by making withdrawals as needed from your savings.

Taxes can be your largest controllable expense in retirement. Educate yourself and/or get professional advice on the best way to withdraw retirement assets. As a rule, it pays to take money from taxable accounts first, leaving tax-advantaged accounts such as 401(k)s and IRAs for last.

Humberto and Georgina Cruz are a husband-and-wife writing team who work together in this column. Send questions and comments to or