The Incredible Shrinking Nest Egg

Consider the case of Art and Cathy Whitehouse. In 2005, Art retired at age 61 as chief engineering technician at Philips, the multinational firm that acquired the company where he had worked for 28 years. He took a buyout and put most of his retirement money into a managed investment account. He figured he and his wife, Cathy -- still working as a receptionist -- were in good shape for the long haul.

Then the financial markets started their steep decline, and Art's managed account took roughly a 40 percent hit, undermining his long-range plan for a worry-free retirement. Instead of watching his retirement assets grow toward the $700,000 that he expected, he saw his combined accounts fall to just half that amount.

So Art, now 65, applied for a Boston Globe Money Makeover to get some professional help rebooting his retirement planning. "We started with a small retirement fund, and now it is a lot smaller," he wrote in his makeover application. His options, he said, seemed limited, and he wasn't sure he could do anything but "hope for the best."

But hope isn't a good financial strategy, as the couple found when they sat down in March with fee-only financial adviser Barbara Nevils in her Wakefield office. After reviewing the Whitehouses' numbers, she gave them the grim news that without some significant changes, they would likely run out of money by the time Art turns 80.

True, the couple would still have Social Security and their Tewksbury house. But by the time their account is empty in 2025, inflation will have reduced the value of their $56,000 in estimated annual Social Security payments to about $36,000 in 2009 dollars. "It's a wake-up call, really," Art said after reviewing the numbers.

The problem, says Nevils, is that the Whitehouses are spending their retirement savings too quickly, withdrawing $30,000 a year to support their current lifestyle. That means they are now drawing down their retirement savings each year by more than 8 percent, an amount that Nevils says is more than twice what they can afford. "Most planners agree that a 4 percent withdrawal rate won't get you in trouble," she says, recommending that the couple reduce their withdrawals to that 4 percent level, which comes to $13,800 a year. "You do that, and you're out into your 90s" before the money runs out.

Cutting annual withdrawals by $16,200, however, doesn't mean that the Whitehouses have to trim that much from their spending, Nevils explains. That's because the couple would save about $5,000 a year in taxes just by keeping that extra money in their IRAs. Indeed, the Whitehouses could make their retirement plan work by cutting $11,000 a year in spending. "That's less than $1,000 a month or $500 a month for each of you," says Nevils.

After hearing the news, Art was skeptical. "I knew we had to cut down," he says. But he would be happier if he and Cathy could maintain their current lifestyle for a while longer before tightening the belt. "Most people die before they get to enjoy their retirement," he says, noting that he's still savoring his trips to Barbados and his skiing outings with his grandson. But Cathy left the meeting with Nevils trying to look for ways to trim expenses. That included leaving her cellphone home in late March when she found herself running out of minutes. "We really needed a kick," she says, noting that they can't afford to keep spending at their present pace.

Nevils based her projections on Cathy, now 63, retiring at age 72. But Cathy, who's had the same receptionist job for 16 years, says she'd be happy to just keep working. "I love my job," she says. "I'd work until I'm 77 or even older."

What should they do with the money they have now? Nevils suggests the couple put 10 years of withdrawals into accounts that keep pace with inflation but carry little investment risk. That means moving $138,000 into a mix of accounts that might include laddered certificates of deposit, immediate-term fixed annuities, and perhaps some bond funds.

The Whitehouses' managed retirement account money is currently spread over 35 mutual funds. "That's a lot of investments for $247,000," says Nevils. "And I do see a lot of overlap there." She suggested that the couple simplify their investments, adopting a portfolio made up of just 10 exchange-traded funds and index mutual funds. Her recommended investments have lower costs than their current holdings, and the Whitehouses could eliminate a 1.3 percent annual fee if they decided to manage their simplified portfolio themselves.

Lynn Asinof is a freelance writer. Send comments to magazine@globe.com. To be considered for a future Money Makeover, fill out the application at boston.com/business/personalfinance/moneymakeover.

DOING THE MATH

Art Whitehouse, 65, and Cathy Whitehouse, 63, Tewksbury

Goal: Rebooting their retirement planning after big stock market losses.

Recommendations from financial adviser Barbara Nevils:

Cut spending to reduce retirement-plan distributions from $30,000 to just $13,800 a year.

Keep 10 years of distributions -- or $138,000 -- in low-risk investments that keep pace with inflation.

In future years, gradually take money out of the financial markets to replenish these low-risk accounts.

Simplify the retirement portfolio, using 10 low-cost funds rather than the current 35.