Whatever dreams and aspirations people may have for their retirement, one goal usually tops the list: Don't run out of money.
"People want a 100 percent chance of not outliving their money," said certified financial planner David John Marotta, founder and president of Marotta Wealth Management. To avoid depleting funds prematurely, he said, the key is to determine a safe rate of withdrawal from retirement assets.
For most Americans, that means balancing lifestyle objectives with other financial goals common to retirees, such as gifting to family and charities or leaving a legacy for others. While budgeting discipline is important for everyone, it is crucial for people near or in retirement. "People want a precise budget they can live by," Marotta said.
The average age of Marotta's clients is 61 when they come to him, and he helps them determine how they can live to 100 on their own resources. He spent a year and a half researching safe withdrawal rates and has calculated that at age 65, a retired person can safely spend 4.36 percent of his or her assets annually. As the retiree ages, the rate of withdrawal rises. If the markets do well, the withdrawal rate can be raised further; if it does poorly, it should be adjusted down. If retirees spend more than that, Marotta said, they run the risk of becoming a burden to someone else down the road.
"If clients tell me they're spending 6 percent of their assets annually, I can tell them how many years [they have] before they run out of money," Marotta said. "Then they have to determine what the plan is when they run out of money."
For those clients who have to adjust their lives significantly, he takes the classic budgeting approach of constructing a pyramid of priorities, starting with needs, wants, dreams and generosity (to family, friends and charities). Marotta helped one retired client — who had a nest egg of $1.2 million but was spending $200,000 per year — scale back his lifestyle dramatically. The client downsized his house and scrapped a golf club membership, among other cuts, bringing his living expenses down to a third of what they had been.
Others may need to ratchet down their intended generosity to younger relatives via 529 college-funding plans, the most common form of financial assistance to children and grandchildren. "A debt-free graduation is a huge gift for a grandkid, but if someone can't afford to give $10,000 per year, they can fund at a lower level," Marotta said.
Financial advisers generally see a 4 percent to 5 percent withdrawal rate from assets as sustainable for retirees. "If clients withdraw more than 5 percent, it's a red flag for us," said Mike Ward, founder and president of Wealth Management Partners.
"The higher the withdrawal rate, the more likely you are to exhaust your accounts," he added. "It can become a negative spiral because you're taking the same amount out from a decreasing account."
On the other hand, Ric Edelman, chairman and chief executive of Edelman Financial Services, said it's rare to see people spend themselves into poverty in retirement. "People are more responsible with their money than the financial industry and the media generally portray," he said. "They're aware of their circumstances and more likely to reduce their expenses to change an outcome."
Edelman also thinks that the obsession with budgeting is misguided. "It doesn't work for Congress, and it doesn't work for individuals. Life gets in the way," he said.
"It's not just your car breaking down and costing $800; it's your granddaughter announcing her engagement," Edelman added. "Good things can cost as much as [the] bad."
Instead of targeting desired spending levels for the future, Edelman suggests, current and prospective retirees should track expenses in the previous 12 months to determine their income needs going forward. "Their spending in the last 12 months is probably a good estimate of what it will be in the next 12 months," he said. In cases where clients are on unsustainable spending paths, he makes the rare recommendation to downsize housing or continue working longer than originally intended.
All three advisers say the wild card — and potential budget killer — is health care. According to Ward, a couple over age 65 can expect to spend $600 per month each between contributions to Medicare, any Medicare supplemental plan and out-of-pocket medical costs.
"It's the biggest expense for retirees," he said.
If a health crisis necessitates long-term care, the expenses can be crippling. Long-term care insurance costs approximately $200 per month per person; people should determine whether they want coverage now or will pay for potential costs out of their own pockets should the time come. Wealthy, poor and single people may choose the latter option, but insurance is probably a good idea for the bulk of middle-class married couples.
"We generally recommend long-term care insurance for most people," Edelman said. "It's usually health care that causes a crisis for people in retirement."
—By Andrew Osterland, Special to CNBC.com