How long will my retirement savings last?

One of the greatest fears most people have when approaching retirement is running out of money. This is a scary proposition, especially if your investments are limited and social security is not enough to make ends meet. Financial planners will gauge your potential success by running projections into the future based on your investments, portfolio strategy, inflation, and living expenses. The result of those simulations will give you a good estimate for how long your money will last. For example, if you have a 50/50 stock to bond portfolio, we can look at the historical performance of those choices and then see what happens if you withdraw $2,500 a month for the next 30 years. The key to solving this problem is understanding your life expectancy. Nobody knows when they are going to die, of course, but we can certainly make informed decisions based on family history. If your family is incredibly long lived, and you are healthy at age 70, there is a good chance you will need to budget for another 25 or 30 years!

Unfortunately, inflation will eat at that withdrawal, making it worth less each year. One of the most common mistakes I see is retirees holding large amounts of cash with virtually no return each year. Inflation can erode the value of that cash quickly, and many people unfortunately run out of money much sooner than expected because of the choice to hold cash.

Retirement withdrawal strategies

Here are some potential withdrawal strategies that you should discuss with a professional as part of your overall financial plan:

• 4% fixed withdrawal rule. This strategy suggests you a withdrawal 4% of your investments each year with slight increases over time to inflation. This strategy is widely used by professionals but will require you to hold some stock, so it can be volatile year-to-year.

• Fixed dollar withdrawals. This strategy calls for taking out a fixed amount of money each year, based on your expenses. This is great for people on a fixed income but does not consider the effects of inflation. $20,000 in 2021 will be worth far more than $20,000 in 2031.

• Systematic withdrawals. With this plan, you only withdraw the earnings from your investments each year, i.e., dividends and interest payments. This plan allows your investments to grow in retirement because your principal remains untouched. This plan is more dependent on market performance, and how much you get paid can vary each year but will likely net you more growth than some other strategies. The inconsistent payout requires flexibility, so its often best for those with other sources of income (e.g., pensions or rental properties).

• Bucket strategy. In the bucket strategy, you have multiple accounts (or one account with split allocations) each with different goals. One bucket is stable and acts as a cash fund. Another holds the investments that produce interest and dividends and provide your income each month. A third bucket is invested more aggressively in growth stocks and riskier investments to fuel long-term growth over time. Buckets two and three “replenish” the cash in the first bucket with their earnings, providing a constant money supply.

One of the primary considerations for choosing a retirement withdrawal strategy is your legacy. Many people use strategies that are designed to grow the account even while taking withdrawals. The goal being to pass on a legacy to your beneficiaries. Unfortunately, this requires considerably more money than a strategy that declines in value over time. A systematic withdrawal strategy might be a good choice for some people, but others might be forced in a fixed dollar withdrawal that decreases their account on a trajectory that will still provide for them well into their 90’s.