Saving to retire is easy as 1-2-3, or a combo

If you were good at word problems in high school, you know that if a Volkswagen Beetle left Chicago at 4:30 and traveled at the speed of light to Denver, it would still leak oil.

But here's a tougher one: How much money do you need if you retire at 62 and don't know how long you'll live or what your rate of return will be? Unlike previous generations, this pool of workers is projected to live nearly as long in retirement as they did in the workplace.

Give up? You're not alone. But it's a problem you're going to have to figure out when you retire. You can attack the problem in three ways, none of which gives an entirely satisfactory solution.

Method 1: The 4% solution

Let's say you have $1 million in an individual retirement account when you retire. And suppose you need $60,000 a year for living expenses, and your tax rate is 25%. You'll need to withdraw $80,000 your first year of retirement ($60,000 for you, $20,000 for the IRS). If you earn 8% a year on your investments, you can take out $80,000 a year forever and not touch your principal. Unfortunately, there are two problems with this approach:

•You can't earn a guaranteed 8% anywhere these days. An ultrasafe 30-year Treasury bill, for example, now yields just 4.25%.

•Inflation will slowly erode your $80,000. After 30 years of 3% inflation, $80,000 will be left with the buying power of only about $33,000. To combat inflation, you'll have to increase your withdrawals periodically.

The good news: If you have 30 years to invest, you can put some of your money into investments such as stocks and corporate bonds that should, over the long term, return more than 30-year Treasury bills.

Several academic studies have shown that if you want to take money out for 30 years, you should keep your money in a mix of stocks and bonds and take a low initial withdrawal — 4% to 5% of your savings. But that's only if you increase your withdrawals each year to account for inflation. You can take out more money if you forgo inflation adjustments for your withdrawals in years when the stock market drops sharply.

Method 2: Immediate annuities

In its most basic form, an immediate annuity is a contract between you and an insurance company. You agree to give the company a lump sum — say, $1 million. The insurer agrees to pay you a monthly amount until you die. If you happened to catch the express bus to the pearly gates a year after you bought the contract, the insurer keeps what money is left over. If, by contrast, you live to 100, you end up collecting more than you paid in and the company has to pay.

A $1 million annuity contract will pay $5,510 a month for life to a couple, both age 62, according to A single woman could get $5,910, a single man $6,290.

Annuity companies are starting to add many bells and whistles to contracts. Vanguard offers an annuity whose payments rise with inflation. One drawback: You'll get a lower initial payment than you would with a traditional annuity. For a single man age 62, the initial payout on a $1 million contract would be $4,700.

Another common option is continued payouts to heirs after your death. And some annuity contracts will let you take out additional money in an emergency.

Your biggest concern should be the issuer's financial strength. Though state guaranty associations cover immediate annuities, typically to $100,000, an annuity from a failed issuer is a problem most people would rather avoid. You can check an insurance company's financial strength at

Method 3: Income-replacement funds

Fidelity Investments has recently started a set of funds with regular payout plans. Vanguard has plans for similar funds. Fidelity's Income Replacement Funds invest in a mix of Fidelity's stock, bond and money market funds. The Income Replacement Funds make regular monthly income payments based on a set period — 10, 20 or 30 years. The fund's payments will often be a mix of dividends, capital gains and a return of your principal.

If you invest $1 million in the fund targeted to last 30 years, for example, you'll get $4,175 a month, or $50,100 in the first year. The fund aims to increase payments each year to keep pace with inflation, but it may reduce payments if the fund performs poorly. At the end of the fund's fixed term, it liquidates any remaining assets and distributes them to shareholders.

The drawback is that income-replacement funds don't guarantee that payments won't fall. But if you need extra money, you can sell shares at no cost.

The main disadvantage to all three solutions: They probably won't generate as much income as you'd like, particularly in these days of low rates. A reasonable strategy would be to try all three, using at least part of your savings in stocks for long-term growth.

John Waggoner is a personal finance columnist for USA TODAY. His Investing column appears Fridays. Click here for an index of Investing columns. His e-mail is