How much money do you need to retire?

A million dollars is a figure often mentioned as a goal for retirement.

With today's low interest rates, where CDs can yield 1 percent or less, many experts believe that even a million dollars may not be enough.

The risk is that -- as we live longer -- the odds increase that we'll outlive our retirement nest egg.

What's the answer?

Keep scrolling. Using real life examples, we'll discuss ways you can reduce the risk of outliving your money.

The 4 Percent Rule

Conventional wisdom used to say that spending 4 percent of your retirement nest egg each year would last 30 years. But given increasing life expectancies and very low interest rates, that advice may no longer be accurate for most households.

The chart at right highlights several withdrawal scenarios. Even withdrawing just 4 percent annually (in green) in a low-interest rate environment could deplete a retirement fund in little more than 20 years.

Some financial experts, in fact, say that a 2 percent withdrawal rate may be required to last a lifetime. Many retirees would find that amount quite insufficient.

What About the Stock Market?

Historically, the stock market returns about 7 percent.

That sounds like a good number, right?

The only problem is market volatility. At right is the historical return of the S&P 500 index.

In 2008, for example, the market dropped about 40%.

Many retirees suffered significant and irreversible financial setbacks because of their reliance upon the stock market.

An Example of Stock Market Volatility

Here's a real life example of how stock market volatility can impact a retirement nest egg.

If you had taken a million dollar portfolio in 1971 and invested it in the S&P 500, knowing that the average return would be over 10 percent, could you safely withdraw $100,000 each year?

The answer is illustrated at right. No. Because of market volatility (in red), the impact on the portfolio is devastating (in blue).

So can retirees protect their nest eggs while taking advantage of good years in the stock market? The answer is yes.

What If You Could Buy "Volatility Insurance?"

There are several ways to limit exposure to stock market downturns while still enjoying the benefits when times are good.

One method is called "Volatility Insurance", which leverages a kind of life insurance product to weather declines in the market.

How does it work? Using our hypothetical million-dollar portfolio, imagine that 75% ($750,000) is placed in an S&P 500 index fund. The other 25% ($250,000) is used to purchase a cash-value life insurance policy that pays dividends, but can also be used to fund retirement needs when stock market declines occur.

At right is a similar portfolio to what we saw earlier (in blue), but this time augmented with "volatility insurance".

Would you like to know more about strategies to protect your precious retirement dollars?

Download our free e-Book Protecting and Growing Retirement Income to learn some of the best ways to enjoy a worry-free retirement.

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