Learning the lessons of life

Peter G. Peterson, co-founder of the private equity firm Blackstone, recently passed away at age 91. The Great Depression that occurred during his boyhood taught him the lesson of never spending more than you earn.

For many, budgeting is like exercising or dieting. It’s good for you but hard to sustain. Without knowing how much you spend, it’s virtually impossible to figure out how much you’ll need to save to reach other goals.

William Bernstein, author of books including “The Intelligent Investor” and “Asset Allocator,” says retirees should think of their portfolios in two parts. The first should contain enough money to cover at least 20 to 25 years of basic living and can be invested in annuities, bonds, and CDs. The rest should be invested in a way that’s consistent with when you’ll need the money, says Bernstein.

But with people living longer in retirement, researchers are rethinking these rules to manage the risk of a market decline.

Conventional wisdom says you can withdraw 4 percent from your savings in the first year of retirement and give yourself an annual raise. But that may change. What is “living within your means”?

To live within your means simply means to spend less on your lifestyle then you generate in earnings. Your “needs” equate to your income to live within that threshold, to spend less than you earn.

Of course, this is clearly easier said than done, given that studies show the majority of Americans today have a hard time coming up with $500 for surprise expenses without putting themselves in debt, at least temporarily. Clearly, many are not living within their means but instead are spending right up to (or beyond) their limits.

To live well within your means should leave you with enough money left over at the end of the month to deal with a surprise or to save for the future.