If you’re like many retired investors, you’ve been waiting for the dawn of higher interest rates to boost your retirement income. Unfortunately, the Federal Reserve recently put the final nail in the coffin on those hopes. It’s likely interest rates will be “zero bound” for at least the next three to four years, and probably longer. This presents some tough choices for retired investors: take more risk or live on less.

Most retired investors are looking to distribute somewhere around 4% from their portfolios each year. This is a distribution rate that’s widely used in the financial services industry and there is good historical data to support it. But all those historical periods had interest rates well above today’s rates, which made it easier and safer to distribute 4%. Now, the only practical way to shoot for a 4% return is to invest more than half of your portfolio in stocks.

Back in the late 1990s, when bonds were yielding over 5%, you didn’t need any money in stocks to achieve a 4% return. Stocks basically served as the icing on the cake in retirement portfolios. But today, you need stocks to serve as the foundation of your retirement income portfolio if you’re seeking returns of 4% or more. Because stock returns are quite volatile, this means that your retirement income will be less certain, and you run the risk of big declines in market selloffs.

If uncertainty and big declines don’t sound that appealing, what are your choices? Well, your best bet is to work on the distribution or lifestyle side of the equation. Basically, you need to cut costs so you can reduce your distributions. Let’s look at a scenario where you decide to distribute only 3% of your money each year. Will that be enough of a reduction to allow your money to last over a long period of retirement?

If you invest in bonds at current interest rates of about 1% and you want to take out 3% a year, you have to figure out how long your money might last. The good news is that under this scenario, even when we factor in an assumed inflation rate of 1.5%, your money should last about 30 years.

But your portfolio will steadily decline as you take out more money than the portfolio is earning each year. After 10 years, about 25% of your money would be gone. After 20 years, 55%, and by the 30th year, you’d have less than 5% left. So you’d be skating on thin ice. Is this a rational way to approach your retirement if you simply are not comfortable with stocks? It is if you are relying on average life expectancies.

For someone who turns 65 this year, their life expectancy is roughly 20 years. If you are married, the joint life expectancy of you and your spouse is about 25 years. Thus, on paper, the odds are neither you nor your spouse would need your money to last for 30 years. Yet there is roughly a 20% chance that one of you will reach age 95. If the longevity risk bothers you, and you don’t want to invest in stocks, you’d have to cut your distribution rate to about 2.5% to stretch the money for about 35 years. That’s going to be tough for most people.

That means most retired investors will need to decide which of these risks is more concerning. Are you worried the stock market will crash and you’ll lose your money, or are you more concerned that if you fail to achieve a higher return, you might outlive your money?

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No one can answer this for you. But I’ll give you my two cents’ worth. Personally, I am more concerned about outliving my money. As just mentioned, the odds are about 20% that you or your spouse will need money for 30 or more years. And if you don’t invest anything in stocks, you may find you’re out of cash in your old age. But if you do invest in stocks, what are the odds you’ll suffer long-term declines and actually make the situation worse?

If the stock market is down for a couple of years, that’s not a big deal in retirement. But if a decline stretched for 10 years, that would make things difficult. The historical odds of the market being negative for 10 years are about 5%.

Now, there are no guarantees on any of this, but you have to weigh the odds that the stock market wouldn’t recover within, say, 10 years against the odds you may outlive your money if you are too conservative. As I said, low rates present tough choices.

Charlie Farrell is a CEO of Northstar Investment Advisors LLC. This article is for information and education purposes only. Past performance is no guarantee of future returns, and all investing involves the permanent risk of loss. Consult your individual financial adviser for guidance specific to your circumstances.

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