Planning for retirement involves more than just saving money; it’s essential to understand how long your savings will last once you stop working. This guide will walk you through the key factors that determine the longevity of your retirement funds and provide strategies to help ensure your money lasts as long as you need it.

Factors Influencing How Long Your Money Will Last

1. Your Retirement Expenses:

Estimate your monthly costs, including housing, food, healthcare, and leisure activities. Remember, expenses can change over time due to health issues or lifestyle choices.

Example:

Let’s take an example of John, a 65-year-old retiree in the U.S., to see how different factors affect how long his money will last in retirement.

John estimates his monthly expenses as follows:

• Housing (Mortgage/Rent, Utilities, Property Tax): $1,500
• Groceries & Dining: $600
• Healthcare & Insurance: $500
• Transportation (Gas, Car Insurance, Maintenance): $300
• Leisure & Travel: $400
• Miscellaneous (Clothing, Gifts, Subscriptions): $200
• Total Monthly Expenses: $3,500 ($42,000 per year)

2. Total Retirement Savings:

The amount you’ve saved, including 401(k)s, IRAs, pensions, and other investments, forms the base of your retirement funds.

Example:

John has saved $600,000 in his retirement accounts, including a 401(k) and an IRA. He also receives $2,000 per month, totaling $24,000 per year, from Social Security.

Since his total annual expenses are $42,000, after Social Security, he still needs $18,000 per year from his savings.

If he follows the four percent withdrawal rule, he would take out $24,000 per year. Since he only needs $18,000 per year, his savings might last longer than 30 years. However, unexpected expenses like medical emergencies or home repairs could change this projection.

3. Withdrawal Rate:

This is the percentage of your savings you take out each year. Traditionally, the 4% rule has been a guideline, suggesting you withdraw 4% of your initial retirement savings annually. However, recent studies suggest a more conservative rate, like 3.7%, to increase the chances of your money lasting throughout retirement.

Example:

John initially follows a four percent withdrawal rate, meaning he withdraws $24,000 per year.

But if inflation rises or market downturns reduce his savings, he may need to adjust his withdrawal rate.

For example, in a market downturn, he lowers withdrawals to $20,000 per year to preserve his savings. If the stock market performs well, he might safely withdraw a little more.

A flexible withdrawal strategy can help his money last longer.

4. Investment Returns:

The performance of your investments affects your savings. A diversified portfolio can help manage risks and returns.

Example:

John has 60 percent of his portfolio in stocks and 40 percent in bonds.

If his investments grow at six percent annually, his money will last over 30 years. If the market crashes early in retirement, withdrawing too much could deplete his savings faster.

To protect against risk, he keeps some cash reserves to avoid selling stocks in a bad market.

5. Inflation:

The rising cost of goods and services over time can erode your purchasing power, meaning you’ll need more money in the future to maintain the same lifestyle.

Example:

If inflation is two percent per year, his $3,500 monthly expenses may rise to $4,500 or more in 15 years.

To counteract this, he keeps part of his portfolio in stocks, which typically outpace inflation. He also reduces discretionary spending in later years.

If inflation is higher than expected, he may need to adjust his budget or income sources.

Strategies to Make Your Money Last

• Create a Withdrawal Plan: Develop a strategy for how much money you’ll take out each year. This plan should consider your expected expenses, life expectancy, and investment returns.
• Adjust Withdrawals Based on Market Performance: In years when your investments perform well, you might withdraw a bit more. In leaner years, consider tightening your budget to preserve your savings.
• Delay Social Security Benefits: Waiting to claim Social Security can increase your monthly benefit. For example, delaying benefits until age 70 can result in higher payments compared to claiming at 62.
• Consider Part-Time Work: Working part-time can supplement your income, reducing the need to draw from your savings early in retirement.
• Manage Debt: Paying off high-interest debts before retiring can reduce your monthly expenses, allowing your savings to stretch further.
• Plan for Healthcare Costs: Healthcare can be a significant expense in retirement. Consider setting aside funds specifically for medical expenses or investing in health savings accounts (HSAs) if eligible.

Tools to Estimate Your Savings Longevity

Several online calculators can help you estimate how long your savings might last based on your current savings, expected expenses, and other factors:

• NerdWallet’s Retirement Calculator: Provides estimates based on your savings and expected expenses.
• Mutual of Omaha’s Savings Calculator: Helps determine the longevity of your savings with regular withdrawals.
• USAA’s Retirement Savings Calculator: Estimates how long your funds will last considering your spending habits and income sources.

Final Thoughts

Ensuring your money lasts throughout retirement requires careful planning and regular reassessment of your financial situation. By understanding the factors that affect your savings and implementing strategies to manage your withdrawals and expenses, you can work towards a financially secure retirement. It’s always a good idea to consult with a financial advisor to tailor a plan that fits your unique needs and goals.