How to Make Your 401(k) Money Last a Lifetime

You probably understand that you should plow as much money as possible into your retirement accounts until the day you actually retire. But then what?

Once you hit retirement, you have to figure out how to live on that money for the rest of your life -- and that can be scary. There are psychological hurdles to overcome.

FBN TOOL: How Much Retirement Income May My 401(k) Provide?

Withdrawing money from your life savings does signify a new stage of life, and that may be difficult to confront. But the finances are also frightening. You have to decide where to invest the money so it will last, and grow, throughout your retirement. And you have to be able to pull money out to regularly to pay your bills.

Folks with fat accounts don't have to worry as much; they can afford top-of-the-line advice and a money manager who will dole out their checks in just the right amounts. But for the rest of us, every penny counts, and we have to do it on our own. The average 401(k) and 403(b) balance for workers between 55 and 64 is $124,000, according to Vanguard Investments.

This will come to a head as the first real 401(k) generation starts to retire. By 2013, there will be as many retirees pulling money out of their retirement accounts as there are workers pouring money in, according to projections from Cerulli Associates, a Boston research firm. But financial services companies and employers are just starting to focus on this "withdrawal phase" of retirement.

One company well-known in 401(k) circles has jumped into that space. Financial Engines, which offers low-cost and automated financial advice to working 401(k) participants now wants to do the same for retirees. The firm, which manages some 4.5 million 401(k) accounts for some 400 large employers, has released Income+ (pronounced income plus), a program designed to let workers leave their funds in their employer-sponsored 401(k) accounts and get affordable money management while they do.

The theory behind Income+ is this: You should keep most of your money in income-producing bond mutual funds as you retire, but keep some in the stock market so it will grow in later years. You can use a small percentage, say 15%, of your assets to buy an annuity that will guarantee income forever if you live beyond 85. And while the program leaves users free to withdraw as much money as they want, whenever they want, withdrawals should really be limited to around 4.25% a year -- or less.

Much of that reflects standard thinking today about retirement withdrawals.

The big no-load mutual fund companies have also introduced products to address this market. Fidelity Investments introduced Income Replacement Funds in 2007 and Vanguard started Managed Payout Funds less than a year later. These funds invest their holdings and send regular "paychecks" to their account holders.

Retirees who are so inclined can do it themselves, of course: A broad mix of investments, a safe withdrawal rate (usually in the 4% neighborhood), and perhaps a small annuity to guarantee funds for the later years does the trick. But if you're not the DIY kind of investor, here are some pointers for considering the latest offerings and the ones likely to pop up over the next few years:

-- Fees are paramount. If you're supposed to withdraw only 4% of your money a year, how do you think a 1% management fee would affect your income stream? Not well! Financial Engines says it will keep its management fees between 0.2% and 0.6%; fees in the underlying investments bring the total to between 0.6% and 0.75%. Vanguard and Fidelity are also known for low fees; they vary depending upon the fund you choose.

-- There are no guarantees. These products make it highly likely your money will last if you invest cautiously and set withdrawal rates conservatively. If you see the word "guarantee" you are probably buying an insurance product, such as an annuity, and not an investment. Typically (though not always), annuity fees are much higher, and they are less flexible about how you can take money out of them.

-- You may need to supplement in later years. Even conservative retirees can run low on cash if the stock and bond markets punish them and they live 35 years or more in retirement. That's where insurance may help. A well-priced longevity policy, designed to kick in after age 85, can keep the money flowing. A long-term care policy can step in if additional assistance is needed.

-- You may not need a "steady paycheck" in retirement. Though you'll still face some regular expenses, such as utilities and food bills, you may find your retirement spending needs more variable than they were when you were working. Some years you go on a cruise and have new grandchildren, and other years you stay home and put photos in your album. So, don't commit too much of your money into an irrevocable income stream.