How Long Will My Money Last in Retirement?
Are you wondering if you have saved enough to have a comfortable retirement? Many people nearing retirement age are wondering the same thing.
Here is a way you can make an intelligent guess at the right answer. And, you don’t need to be a math genius to have a pretty good idea about the right answer.
Fact First
To get started, you just need to know a few basic facts including:
- Annual Expenses: What do you anticipate your annual expenses will be in retirement? Include expenses for housing, food, transportation, entertainment, clothing, education, medical needs, taxes, and so on.
- Social Security and Pensions: How much will you receive in Social Security and company pensions? While Social Security payments will increase with inflation, often company pensions will not be indexed to inflation.
- Savings and Investments: How much will you have saved and invested when you retire? This is the amount you have to draw on when your Social Security and pension fall short of your expenses. Include money in the bank, IRAs, and other investments.
- Savings and Investments Growth Rate: What is the average percentage by which your savings and investments grow from year to year? This does not include how much you add to them. Just consider the average growth rate.
- Inflation Rate: What do you think the average inflation rate will be during your retirement? This is basically the rate at which goods and services are increasing in price. Alternatively, you may think of this as the rate at which your money is losing it buying power. This will vary from year to year depending on many factors including who is in national office, the state you reside in, and the types of purchases you typically make.
- Initial Annual Withdrawal: Your Social Security and pension will probably fall short of your Annual Expenses. The Initial Annual Withdrawal will make up the remainder of your Annual Expenses. The withdrawal amount will increase annually by the Inflation Rate.
Now Play With the Numbers
Now you can use this information to see how well prepared you are for retirment.
Download our Open Office spreadsheet HERE.
Open the spreadsheet in Excel or any free spreadsheet like Open Office Calc.
You will see four boxes in yellow. This is where you will enter your data.
The first entry is your combined savings and investments (Initial Savings / Investments). Include the value of all your personal savings and investments.
Next, enter the weighted average growth rate for all your savings and investments (Growth Grate on Savings / Investments). For example, if you have $40,000 in the bank earning 2% per year, and $250,000 in various investments earning 12% per year, your weighted average would be:
Weighted average = [2% x 40000 + 12% x 250000 ] / [40000 + 250000] = 10.62%
You would enter 10.62 in the yellow box next to Growth Rate on Savings / Investments.
Next, consider how much you typically spend in a year, and what your Social Security and retirement pension will provide. Then determine how much you will need to withdraw from your savings and investments. You will enter that amount in the yellow are next to Initial Withdrawal from Savings / Investments.
Finally, you’ll have to guess at the average Inflation Rate. In recent years the inflation rate has varied form a high around 9% to just below 3%. Try entering a number between 3 and 9 in the yellow box next to Inflation Rate (%).
The spreadsheet will calculate future values of your
- Savings / Investments,
- Withdrawal (based on the inflation rate),
- Earnings (based on the Investment Growth Rate on Savings / Investments), and
- % Increase in Savings / Earnings (based on the previous and current Savings / Investments values).
You’ll want to scroll down the spreadsheet looking at the the Savings / Investments column. When the numbers turn red (or negative) your savings and investments have run out.
Then look in the left column at the Year your savings and investments turn negative. If you think you will live more years in retirement than that year, you need to make some adjustments to your retirement plans.
Of course, this is only an estimating tool. Spending and inflation will vary from year to year. So this estimate is based on averages which should give you a reasonable picture of what your future will look like.
Health Caution
Most people are living longer today than ever before. So, your retirement may last many happy years.
Keep in mind that it is a sad fact that the last decade of life often is beset by increasingly dire chronic health conditions. Medical expenses often soar in the final years of life. Experience show that 25% of all Medicare spending goes toward caring for patients in the last year of life.
So, now is the time to think about what you eat and how you live. Many diseases are caused by environmental factors as well as the foods we choose to consume. Be wise in your choices and you will live a healthy and vigorous life for many years.
Make Your Savings and Investments Last
Ideally, you want you savings and investments to last as long as possible.
Here is how to make your savings and investments last forever.
- Your Earnings must consistently be equal to or larger than your Withdrawal.
- Your % Increase in Savings / Investments must be equal to or larger than the Inflation Rate %.
To make your Income Producing Investments last longer you’ll need to adjust some of your input values.
Initial Savings / Investments: To increase this number you may have to save more and/or work longer. Try increasing this input value and see what it needs to be in order to extend your investments beyond the number of years you hope to live in retirement.
Growth Rate on Savings / Investments: Increasing this value will extend the number of years your savings and investments will last. You often can allocate some of your lower earning investments into ones that have a higher rates of return. For example, I am moving some of my credit union savings into fractional real estate. You can start investing for as little as $100 and current yields are near 17%, lots better than money in the bank. Also, make withdrawals from the lowest earning assets first which raises your overall growth rate.
Initial Withdrawal from Savings / Investments: For many people it will be an amount to make up for the sudden reduction of money available for a normal lifestyle. Although you don’t need to withdraw the government’s Required Minimum Distribution (RMD) until you are aged 72, you’ll fund you will probably increase expenses for Medicare, prescription drugs, hobbies, social activities, travel costs, and entertainment. Enter this amount in the Initial Withdrawal from Savings / Investments. This amount will increase by the Inflation Rate % each year.
Inflation Rate %: While it would be nice to lower this value, it is mostly not within your control. It depends, to a large extent, on who is controlling the purse strings in the Federal government and on global economic events. To a minor extent you can control how inflation affects you by purchasing goods that have not increased greatly in price, growing some of your own food, and voting for government officials who are responsible spenders.
How Long Will My Money Last Conclusion
The spreadsheet is an estimate of your financial position during retirement. It is meant to get your thinking about how to prepare for retirement and to take appropriate action.
Projections are based on assumptions about various financial patterns that may or may not materialize. Projections are not guarantees of future performance. Actual results may differ materially due to risks and uncertainties.
Please contact us to let us know if the spreadsheet was helpful to you and offer any suggestions you may have.