Walnut Creek, Calif. ? They saved it. Now comes the spending part.

Millions of baby boomers who have worked hard and saved for retirement over the past few decades are now faced with the challenge of how to spend and manage their nest eggs once they retire. Figuring out how to do that while making the money last over their lifetimes is no easy task.

Since he was 21 years old, Daniel Foster always made it a point to put away money for retirement. Last September, the 62-year-old retired from a career in industrial sales. His wife, Barbara, is still working as a real estate broker-owner.

“Part of this program is thinking ahead and where are you going. It’s about trying to manage what you have. It’s about living a life where you don’t have to think ‘How am I going to manage to pay for that?'” Daniel Foster said.

The Fosters soon expect to start drawing some income from their retirement portfolio to supplement their monthly living expenses. Two investment advisers from Charles Schwab are giving the couple advice on how best to manage the portfolio while taking out withdrawals for living expenses.

“They’re helping us to manage it so I can rest at night,” said Daniel Foster, who is spending more time on the ski slopes with a volunteer ski patrol since his retirement.

Starting in the year 2011, the first wave of the country’s more than 78 million baby boomers – those born between 1946 and 1964 – will start to turn 65 years old.

IRAs aplenty

Four of 10 U.S. households owned an IRA in 2007, with total assets in those accounts valued at $4.6 trillion, according to the Investment Company Institute, a trade group for mutual funds. About three-quarters of those IRA households also have a 401(k)-type plan or company pension. About half of households without an IRA reported having a 401(k)-type plan or company pension.

A retirement portfolio can include many different financial vehicles. There are also brokerage accounts, savings accounts and money market funds.

The portfolio is meant to supplement whatever non-portfolio retirement income, such as Social Security payments or pensions you expect to receive at retirement.

Before you start cracking open your retirement nest egg, consider:

¢ What accounts should you draw down first?

¢ What are the tax consequences of those choices?

¢ How much of the portfolio should you take out each year to pay for your living expenses?

“It is a complicated topic,” said Rande Spiegelman, vice president of financial planning at the Schwab Center for Financial Research. “The trick here is making the money last as long as you do and giving yourself a cost-of-living increase” to keep up with inflation in future years.

While some expenses during retirement years will be met by nonportfolio sources such as Social Security payments and possibly a company pension, a retirement portfolio is going to have to do the heavy lifting if you want to maintain your current standard of living, experts say.

‘4 percent solution’

To achieve this goal, Schwab and other financial experts point to what’s known as the “4 percent solution.”

It’s a strategy designed to make a portfolio made up of conservative-to-moderate investments at the time of retirement last for 30 years with a 90 percent certainty.

In a nutshell, the idea is to have a retirement portfolio that is approximately 25 times as large as your first-year withdrawal, which roughly would translate into 4 percent of the portfolio amount.

Gains on investments sales held a year or more in taxable brokerage accounts are subject to capital gains taxes.

Those are typically lower than the income-tax treatment applied to withdrawals on tax-deferred retirement accounts. Capital gains are taxed at a maximum rate of 15 percent while income can be taxed as high as 35 percent.

“It’s more tax-friendly than taking money out of a (traditional) IRA,” said Jim Bell, president of Bell Investment Advisors.

“When you take it out of a brokerage account : you can manage the rate of realized capital gains and losses so you lessen the impact of taxes on your account.”

Tax advantages

The tax advantages provided by a Roth IRA means that it should be left to grow for as long as possible.

While a traditional IRA requires an investor to start taking minimum distributions at age 70 and a half, there is no such requirement for a Roth IRA. Because the taxes are paid upfront on contributions, no taxes are due on withdrawals and earnings taken from a Roth account.

(A Roth IRA investor has to have an account open for at least five years and be 59 and a half years or older to avoid a 10 percent penalty tax on earnings.)

“The Roth IRA you should touch last because it is your most valuable account and you are not required to take distributions from it. You want to hold onto it as long as you can,” said Rich Golinski, a principal at Bingham, Osborn and Scarborough LLC, an independent wealth-management firm.

Taxes aren’t the only factors that should drive withdrawal decisions.

The composition of the portfolio also needs to be considered. To that end, retirement portfolios need to be rebalanced on a yearly basis.

Rebalancing is the selling or buying of stocks, bonds and other financial vehicles to reflect a portfolio’s current target asset allocation.