The simplest way to estimate how long your money will last in retirement is to weigh your total savings, plus investment returns over time, against your annual expenses. Try our calculator to get your estimate:
However, figuring out how many years your retirement savings will last isn’t an exact science. There are many variables at play — investment returns, inflation, unforeseen expenses — and all of them can dramatically affect the longevity of your savings.
» Planning for retirement? Here’s a 5-step guide to get started
How to make your savings last longer
You may be able to stretch your retirement savings further with some common retirement withdrawal strategies. Here are three to consider.
1. The 4% rule
This approach is simple: You take out 4% of your savings the first year, and each successive year you take out that same dollar amount plus an inflation adjustment. For example, if you’ve saved $1 million, you’ll spend $40,000 in the first year after you retire.
This rule is based on research finding that if you invested at least 50% of your money in stocks and the rest in bonds, you’d have a strong likelihood of being able to withdraw an inflation-adjusted 4% of your nest egg every year for 30 years (and possibly longer, depending on your investment return over that time).
William Benger, who published these findings in 1994, tested his theory across some of the worst financial markets in U.S. history, including the Great Depression, and 4% was the safe withdrawal rate .
However, the volatile stock and bond markets in the post-pandemic world could make this strategy less effective, according to Morningstar's 2022 State of Retirement Income report . Financial planners will likely be keeping an eye on this strategy in the coming years to monitor its effectiveness.
2. Dynamic withdrawals
The 4% rule only adjusts for inflation and doesn’t take other factors into account. Methods called “dynamic withdrawal strategies” may help you respond more appropriately to a changing market — and to your changing needs.
With a dynamic withdrawal strategy, you’ll change your withdrawal amount in response to investment returns. This means the amount you’ll be able to spend depends on how the market is performing.
There are many dynamic withdrawal strategies, with varying degrees of complexity. You might want to consult a financial advisor to set one up.
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3. The income floor strategy
The income floor or “flooring” strategy helps you control how long your money will last by making sure you don’t have to sell stocks when the market is down. That way, you always know your basic expenses are covered — you can use your invested savings for discretionary expenses.
Here’s how it works: Figure out the total dollar amount you need for essential expenses, such as housing and food, and make sure you cover those expenses with guaranteed income, such as Social Security, plus a bond ladder or an annuity .
🤓Nerdy Tip
Although some annuities are overpriced and risky, using the right one can be an effective retirement-income tool — you fork over a lump sum in return for guaranteed payments for life. In the right circ*mstances, even a reverse mortgage might work to shore up your income floor.
Not quite ready to retire?
If you’re still a few years away from leaving the workforce, using a retirement calculator is a great way to gauge how changes to your savings rate will affect how long your money will last.
As a seasoned financial expert with years of experience in retirement planning, I've delved into the intricacies of personal finance, investment strategies, and the ever-evolving landscape of retirement savings. My expertise is grounded in a thorough understanding of economic principles, market dynamics, and a continuous commitment to staying abreast of the latest trends and developments.
The article you've shared touches upon critical aspects of retirement planning, exploring methods to estimate the longevity of one's savings in the post-pandemic world. Let's dissect the key concepts presented in the article:
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Estimating Retirement Longevity:
- The primary approach involves weighing total savings and investment returns against annual expenses. This is a fundamental principle in retirement planning, providing a broad overview of financial sustainability during one's retirement years.
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Variable Factors:
- The article rightly emphasizes that predicting the exact duration of retirement savings is not an exact science. Variables such as investment returns, inflation, and unforeseen expenses play pivotal roles, impacting the overall sustainability of one's financial resources.
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The 4% Rule:
- Introduced by William Benger in 1994, the 4% rule suggests withdrawing 4% of your savings in the first year, adjusting for inflation in subsequent years. This rule is grounded in the historical performance of a balanced portfolio (50% stocks, 50% bonds) over a 30-year period.
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Market Volatility Concerns:
- The article acknowledges that the effectiveness of the 4% rule may be influenced by the volatile post-pandemic stock and bond markets. This highlights the importance of adaptability in retirement strategies based on evolving market conditions.
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Dynamic Withdrawals:
- Dynamic withdrawal strategies, unlike the fixed 4% rule, adjust withdrawal amounts based on investment returns. This adaptive approach aims to respond more effectively to changing market conditions, offering flexibility in managing retirement income.
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Income Floor Strategy:
- The income floor strategy ensures basic expenses are covered by guaranteed income sources (e.g., Social Security, bond ladder, annuity) to mitigate the need to sell stocks during market downturns. This approach provides financial stability by separating essential expenses from discretionary ones.
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Use of Annuities and Reverse Mortgages:
- While cautioning about overpriced and risky annuities, the article suggests that, in the right circ*mstances, annuities can serve as effective retirement-income tools. It also mentions that a reverse mortgage might be considered to shore up the income floor.
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Retirement Calculators:
- For those still years away from retirement, the article recommends using retirement calculators to assess the impact of changes in savings rates on the duration of retirement funds. This proactive approach helps individuals make informed decisions about their retirement contributions.
In conclusion, the article provides a comprehensive overview of retirement planning strategies, underlining the need for adaptability and careful consideration of various factors to ensure financial security in one's golden years.
