Outliving your retirement savings is a common source of anxiety among retirees and individuals who are still saving for retirement. Particularly when retirement is still a long way off, it can be difficult to determine whether your retirement savings will last long enough.
There are four basic components to making this retirement planning calculation – how much you have available for retirement, how those assets will be invested during retirement, what your living expenses will be in retirement, and how long you’ll live. The easiest way to estimate how long your retirement assets will last is to use one of the many online calculators that you can find through a quick Internet search.
Here are the fundamental inputs that you will need to consider before using an online retirement calculator.
How Much Do You (or Will You) Have? If you’ve already begun your retirement then you can easily find the answer to this question by reviewing your latest retirement account statements. If you still have a number of years before you begin retirement, then you’ll need to forecast how much you’ll have. Use your current personal budget (or develop one if you don’t have one) to estimate how much you’ll be able to accumulate before you retire.
How Are You Investing Your Retirement Savings? Even though there is a fair degree of uncertainty with respect to future job earnings, there’s even more uncertainty when it comes to how your retirement savings investments are going to perform over time. When you are making these calculations, it’s good to err on the side of caution – stick to using long-term historical rates of return, or perhaps even lower. If you assume you’ll make a 25% annual rate of return on your retirement investments, and then don’t generate those returns, you’ll have a significantly underfunded retirement.
What are Your Retirement Living Expenses? Your retirement savings will last longer if you spend less of it each month. While some of your retirement expenses are going to be fixed, many of them are within your control. If your calculations yield an unfavorable result, then you may need to adjust your expectations for your standard of living in retirement in order to make your savings last longer. Alternatively – or in addition to a lifestyle change – you might wish to consider working longer before you retire. This will let you build more in savings and wait longer before starting to draw those savings down.
Considering Life Expectancy. It can be difficult to think about, but your calculation will need a value for how many more years you expect to live. The IRS publishes standard life expectancy tables that make a good starting point, although you may wish to adjust the value appropriately depending on your current level of health and your family’s medical history.
Once you’ve made the above calculations, you can start considering other options in order to optimize your results. Consider purchasing an annuity with part of your retirement savings for example, and don’t forget to consider how your anticipated Social Security benefits will fit into the overall plan.
Tags: retirement advice, retirement calculator, retirement planning
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Outliving your retirement savings is a common source of anxiety among retirees and individuals who are still saving for retirement. Particularly when retirement is still a long way off, it can be difficult to determine whether your retirement savings will last long enough.
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