How long will my money last?Robert Graham
You can also use the calculator in full screen.
You can use the calculator above to answer the question “how long will my money last” with systematic withdrawals. It will work for inheritance windfall or insurance as well as retirement savings in terms of how the withdraws will impact the total, but there are many different considerations in those scenarios.
There’s no pat answer to how long your money will last, but there are a wide variety of factors that will impact how long it will last.
How long do you need the money to last?
For those entering retirement, we can pick a conservative number for life expectancy. After all, we want our money to last at least as long as we will. If you are also planning for a spouse that you expect to outlive you then you should use the more conservative number.
90 years is a pretty conservative number if you’re under 70. If you’re older than that you may want to consider 100. If you’re curious how we arrived at that number you can check out the actuarial tables from the Social Security Administration Office of the Chief Actuary.
Your current age subtracted from 90 (or 100) is the time you need your money to last. The best assumption is that you will want to have a very similar income to the income you have in your last few years before retirement. That means you need to save enough money to cover that income for the years you expect to live. You may have some Social Security or pension coverage that provide for part of the income you need. You can use our savings and retirement calculators to determine what effort you have left to devote to savings.
Choosing a conservative age beyond our life expectancy and a comfortable income level gives us a buffer or a margin of safety in case we live longer than expected, have higher expenses, or unexpected circumstances we want to meet.
Don’t forget about inflation
If you’re planning to have certain amounts of money many years in the future you absolutely must think about inflation. The value of money in modern economies degrades over time. The central banks in Western countries typically target 2% inflation each year. That means your whole dollar loses two cents of value each year.
This can have a dramatic impact over years. You should be sure to set your target income and savings goals with inflation in mind. It’s also important to consider when you look at subjects below like income floors, withdrawal strategies, and asset allocation. Assets you can invest in like real estate or stocks typically don’t fall in value as would cash.
I’m not retiring — I just don’t know what to do with a windfall?
If this is just a windfall of an inheritance or life insurance money at an earlier stage of life then you likely want to follow the typical personal finance advice and steps. First, if you’re in grief then take six months and breathe. Don’t do anything or take any advice. Now: get out of debt besides a mortgage, save an emergency fund of 3-6 months expenses, save up to your checkpoint for retirement, save for your children’s college years and weddings, pay off the mortgage, invest wisely, and enjoy life.
Savings withdrawal method
We know how long we expect to live and how much cash we will need on hand. Turning a pile of cash into a plan that generates high certainty income each year for decades is a delicate dance. There are many ways to approach it, but the most common one is probably to aim to withdraw no more than 4% of your total portfolio each year.
Why is 4% considered a safe withdrawal rate?
This rule specifies that based on historical market results, it’s safe to withdraw 4% of your total retirement savings every year without risk of depleting the funds as long as you keep it invested in the market. This would have worked even in the Great Depression.
Our calculators generally use 4% as the rule of thumb for how much retirement income a given amount of retirement savings will generate. You might want to have a lower rate for a more conservative projection (probably not). More likely, you may tinker with a higher rate depending on how many retirement years you are looking to fund.
Those choices also depend on whether you want to leave behind money or spend what you’ve accumulated on the way out. If you’re already 90, you probably don’t need to project 35 years of retirement ahead. If you’re 60 you may well want 30-35 years or more depending on health, history, and other factors.
It is possible that you can combine some fixed income like social security or a spouse’s pension to your withdrawal considerations.
Play around with our retirement calculator [scroll down past the savings calculator] to get a sense of how much savings generates how much income with different withdrawal assumptions.
Does my asset allocation matter for safe withdrawal rates?
Safe withdrawal rates are generally set with respect to as much market history as possible, but you may want to consider if you should invest outside equities as well as if it would adjust your safe withdrawal either up or down depending on your investments.
Most portfolios built for things like the 4% rule will expect at least 50% of your portfolio is in equities. Often, a portfolio of 80/20 or 70/30 is typical but you would trend towards less overall in stocks as your time horizon shortens.
The primary impact of additional asset classes is to reduce your exposure to volatility that is typical in equities. On a short time horizon, mixing asset classes makes more and more sense.
It is, however, possible that moving too far away from a portfolio with a majority stake in equities could shift you into risk for safe withdrawal rates no longer being a safe assumption. You might consider using a withdrawal rate below 4% or considering rebalancing your portfolio.
Is 2.5% or 3% a safe withdrawal rate?
4% is also called the “maximum safe withdrawal rate” so yes, with similar assumptions, a smaller rate of withdrawal from savings will be safe.
These should be safe withdrawal rates for the assumptions in the Trinity Study that established the safe withdrawal rate of 4%. You may want lower withdrawal assumptions if you have a long time horizon or encounter early stock market volatility.
Dynamic withdrawal strategies
This is a method of pulling out money in retirement that folks use to smooth out depleting the funds when the market is highly volatile. You pull out more money in good years and less money in bad years.
The calculators don’t use a strategy like this because we can’t project what the market returns might be in a future year or series of years.
It’s most useful to match some desired spending pattern changes. The 4% rule is inflexible and won’t work for everyone or every retirement runway. You may want to take a European vacation in retirement, but wait for the one year in the next five that the market returns are high to make the withdrawals.
One common dynamic withdrawal strategy — the Guyton-Klinger strategy — is to increase your withdrawal amounts 10% after high return years and decrease it by 10% after poor return years.
Dynamic strategies are many and can be very complex. It’s important to proceed carefully and with clarity about how these choices affect your future. One major difference for dynamic withdrawal strategies: tax implications on annual income.
Building an income floor
It can be stressful to put a lot of money into equities and watch big volatile swings take 20% or 30% out of your savings. It can be years before stocks recover from large shocks like that. It can help weather those swings if you know you have a certain amount of income no matter what happens in equity markets. How can you guarantee a certain amount of income each year?
There are a few strategies for approach. You can ladder CDs or bonds to mature each year or two in the amounts that you need for income. This will limit your upside because those investment vehicles don’t have the same growth potential as stocks, but it also limits your risk and gives you safe income for a set of years.
Social security and pensions can provide an income floor. On top of those, you can purchase annuities to try to have a set amount of income. Annuities are controversial, however, and many people will rightly suggest that few people should invest in them. We discuss annuities more below. Fixed annuities are typically purchased from an insurer from lump sums in your retirement accounts and pay out specified sums each year in exchange for the lump sum.
The target amount for your income floor will depend on how much risk you are comfortable taking, what your budgetary needs are that we established earlier, and which options above are available to you.
How long will my financial windfall from an inheritance or life insurance last?
How long will $1,000,000 last? How long will $500,000 last?
The answer to these questions are all interlinked. The calculator above can help you figure what any sum might do for you over a number of years if we fix the expectations for the interest rate, taxes, and how much you will withdraw each month. This can be a really useful rule of thumb to guide you.
If you’re really unsure about how to proceed, it may be best to find a financial professional.
For example, withdrawing $100,000 each year when the market return for your money is 5.5% will drain $1,000,000 fund in about 11 years. The same market return and withdrawal pattern will burn through $500,000 in just five years.
It’s impossible to know how long a fund will last unless you know how much you plan to withdraw and spend each year. The “4% safe withdrawal rate” is a calculation from a lot of historical data that shows you can typically maintain a 4% income from a portfolio over most retirement windows. 4% is 0.04. 0.04 times $1,000,000 is $40,000. So, the safe withdrawal income is about $40,000. For $500,000 it moves down to $20,000.
What 4% makes it safe and how does that translate to life?
Well, if you average taking out $20,000 a year or $1,667 a month from your $500,000 and the market returns average 5.5% in 30 years you’ll have $1,000,000 left. Now, that’s pretty safe.
You could, of course, choose to take a little more as the portfolio grew but you’d probably want to seriously consider how long you expect to live and if you want to leave behind a legacy amount of money for an estate, family, or charity.
Now, assuming a straight 5.5% return usually shows great outcomes and this calculator isn’t sophisticated enough to reveal what happens when you are withdrawing a less safe amount but the market takes a dive in the early years of retirement. It can be grisly. That’s why the “4% rule” is so safe. There’s never been a market where you couldn’t recover, historically speaking.
How to minimize taxes on an estate?
There are a wide variety of approaches that can help reduce estate taxes. You should likely contact an estate or tax attorney to construct a plan that works best for you.
Some options for reducing your estate tax exposure includes gifting money to people and charities as well as a variety of trusts. The details are myriad and very context driven.
Should you payoff your mortgage or invest?
We have a series of very short podcast episodes exploring this question in detail. There are a lot of equivalent bets you can consider to compare the two, but the choice is a personal one that depends a lot on your financial position, time before retirement, and retirement plans.
What are the tax implications of a windfall?
First, generally speaking life insurance proceeds excluding interest is not considered income in the US.
Similarly, inheritances are not considered taxable in the US in most circumstances. We like this article from Intuit about managing for inheritance tax implications.
If you win something like a raffle or lottery then normal income tax considerations apply and it may be worth consulting a tax attorney.
Should I invest a windfall into an annuity with an insurance company?
Many a retiree faces this question. It is not a simple answer. The most common general advice from folks not selling annuities is that annuities are bad for most people. At the very least, you should probably only consider a fixed annuity. The primary benefit of an annuity is to provide “guaranteed income” which is good as long as the insurance company that sells it is stable. This can create a higher income floor than you might have with your social security benefit.
Annuities come in many shapes and sizes. For certain people with specific circumstances they can be a really positive place to put money and generate retirement income. You no longer have to think about the serious effort of managing your own nest egg or following complicated investment advice. For more information on a scenario where you might want to consider a fixed annuity we suggest this discussion on reddit.
We are not financial professionals and are not offering legal or financial advice. We suggest you seek the advice of a professional if you are uncertain.
How do professional wealth managers and advisors make the projections and decisions?
Professionals in wealth management would use Monte Carlo simulations that give expectations like, “There’s a 65% chance you can maintain $65,000 annual income from this next egg for the next 25 years.” We can help you if you want to get more sophisticated, but for many cases it’s not required.
How much money will I have when I retire?
Checkout our calculator for retirement income and projecting the life of your nest egg.
How long will Social Security last?
There are some financial problems with the social security program in the United States. The promises are outweighed over the longer haul by the cost of the promises. The system as constructed would likely run out of funds around 2035.
That said, it is very unlikely that the system will collapse or stop providing benefits. Social Security is not that difficult to save with some changes to either the cost side where benefits to recipients are reduced or to the income side where more taxes are raised or directed to Social Security programs.
It is wise not to make Social Security the fullness of your retirement plan because you will not have control over political choices that may severely impact your retirement.