Will your retirement savings last for the rest of your life? This depends on how much you have, how much you need to withdraw, inflation, and the returns your investments earn. Nobody has a crystal ball that tells you exactly how long your money will last, but here's the next best thing.
How much can you reasonably expect to earn on your savings?
First of all, when I say the word "savings," I'm not referring to the emergency cash you have stashed away for a rainy day. Rather, I'm talking about the money you have invested, or are specifically saving for retirement.
How much can you withdraw?
The most frequently used guideline is known as the "4% rule" of retirement. Basically, this rule says that if you withdraw 4% of your savings during the first year, and give yourself cost of living increases in subsequent years, your money should last for at least 30 years.
While this rule is admittedly far from perfect, it's a pretty good rule of thumb to start with. To calculate your monthly withdrawals using the 4% rule, simply divide your total savings by 25, and then divide that result by 12. For example, if you have $1 million saved, the 4% rule says that you can withdraw $40,000 during the first year. On a monthly basis, this is $3,333.
Don't forget about inflation
While inflation hasn't been much of an issue over the past few years, you can count on it over the long term. Over the 100-year period from 1913-2013, the average inflation rate in the U.S. was 3.22%. So, expect something in that ballpark, on average.
What this means to you is that you should anticipate needing more of your savings as time goes on. In our previous example, if you're withdrawing $40,000 from your savings this year, based on historical inflation rates, you should plan on $41,228 next year, and $42,617 the year after that.
What about taxes?
This refers to the tax you'll pay on your investment returns, and in order to determine what your tax implications will be, you need to consider which of the three types of accounts your savings is in.
Use an online calculator to start to count and plan your finances today!