MoneyLifeCalcThe question behind every retirement plan is simple: if I stop working at a certain age, with the savings I have and the life I want, will the money last? You don't need complex software to get a solid first answer. You need five numbers and an honest look at inflation.
The five numbers you need
- Savings at retirement: everything you've set aside to live on.
- Monthly expenses: ideally from a real record of what you spend, such as a yearly ledger, not a guess.
- Guaranteed income: Social Security, pensions, and other steady income, and the age each one starts.
- Expected return: what your savings earn each year after you retire.
- Inflation: how fast prices rise. Many plans assume about 3%.
How the math works, year by year
Each year, add up your expenses, raised by inflation from the year before. Subtract your guaranteed income. The shortfall comes out of your savings, and whatever is left keeps growing at your expected return. Repeat until age 100, or until the money runs out. Our Retirement planner does exactly this and shows the balance at every age.
Why inflation matters so much
Over a 40-year retirement, inflation is the biggest force in the plan. At 3% a year, prices roughly double every 24 years. Expenses of $5,000 a month at age 60 become about $10,000 a month by 84, just to buy the same things. Social Security benefits rise with inflation, which helps a lot. Most private pensions don't, so their buying power shrinks over time.
Choosing a realistic return
Long-run U.S. stock returns have averaged around 10% a year before inflation, but most retirees hold a mix of stocks and bonds to reduce the risk of a big loss right when they need the money. A mixed portfolio earning 4% to 7% a year is a common planning range. Try several: our planner shows how long the money lasts at returns from 3% to 10%, so you can see how much your plan depends on this one assumption.
The 4% guideline, and its limits
A widely used rule of thumb says that withdrawing about 4% of your savings in the first year, then raising that amount with inflation, has historically lasted about 30 years for a balanced portfolio. It's a useful check, but retiring early or planning to 100 stretches retirement well beyond 30 years, so a lower first-year withdrawal rate is safer. The planner shows your first-year withdrawal rate so you can compare.
If the money runs out too soon
You have more levers than you might think. Each one changes the result, and you can try them in the planner:
- Retire a little later. One or two extra years add savings and shorten the years you draw on them.
- Delay Social Security. Each year you wait past full retirement age, up to 70, raises your benefit by 8%. See the Social Security claiming age calculator.
- Trim expenses. The planner shows the highest monthly expenses your savings can support to age 100.
- Save more now. The Investment projection shows how extra monthly savings grow before retirement.
Don't forget taxes
Withdrawals from traditional 401(k)s and IRAs are taxed as income, and required minimum distributions start at 73 or 75 depending on your birth year. Leave a margin in your plan for taxes, and check your future required minimum distributions. Revisit the plan each year, comparing it with what actually happened, the same way you'd check a budget against a ledger.