Updated: Feb 15
There isn’t an exact science to estimating how long your money will last you after retirement. There are many variables at play — your lifestyle, future inflation rates, investment returns, unforeseen expenses — and all of them can dramatically affect the longevity of your savings.
But there’s still value in coming up with an estimate.
What do you want of your retirement?
The first question I ask of anyone approaching retirement is, “What is your retirement vision?”
What would you like to do with the extra 40 hours once you are no longer working full time? Perhaps take up a new hobby? Volunteer? Work part-time? Travel? Knowing what you intend to do with your time reveals what you will need financially to support that vision.
To keep your retirement spending within budget, aim to spend no more than 3-5% of your investment per year. This assumption is based on the fact that your investment should grow at a similar or better pace. Therefore, your nest egg should remain the same throughout your retirement. Following this basic rule of thumb throughout retirement will insure you do not want to run out of money.
Your worst case scenario is underestimating how long you will live or the amount you will need to live your best life. Begin by checking out this Life Expectancy Calculator.
What expenses may change during retirement?
First, if you currently have a budget, sit down with your spouse or partner and review your budget.
Try to estimate expenses that might decrease when you retire. For example, your children may finish college or you may stop paying for a cell phone bill or subsidizing rent. Your mortgage may be paid off in a few years. Make a list of any expenses that may end.
Then try to estimate expenses that might increase in your retirement. For example, if you intend to travel more, set an annual budget for road-trips or air travel. If you are planning to nurture new hobbies, budget their costs. Some hobbies can be inexpensive such as drawing and reading or very costly such as sailing and skiing.
Most importantly, create a retirement budget even if it is not perfect.
How will my healthcare expenses change during retirement?
Healthcare expenses inflate 6% per year. Your health care expense may double during the duration of your retirement.
Be sure to include funding for increased health care insurance premiums and out of pocket deductibles. These can run up to $14,000 a year prior to age 65 (per person). And $7,200 a year starting at age 65 for Medicare and Medigap insurance you purchase.
Remember that Medigap policies don’t cover long term care, vision or dental care, hearing aids, eyeglasses or private duty nursing. So, you should plan for out of pocket expenses or shop for insurance. Review Medicare.gov’s Out of Pocket Cost Calculator to help estimate future expenses and look for a good supplemental policy.
Lastly, check to see if you can stay on your employer’s group plan during retirement.
What other insurance should I consider before retiring?
Because long-term care has become more expensive, you may want to consider long-term care insurance. Straight long-term care policies that pay a daily benefit have become almost cost prohibitive, which is why I would recommend evaluating if your life insurance policy offers a long-term care rider. It may also be worthwhile to evaluate whether you have sufficient wealth (or sources of income) to self-fund long-term care.
Work with a financial advisor to evaluate setting aside sufficient long-term care funding before you retire. Place those dollars in a separate investment account earmarked for long-term care.
How do I replace my income in retirement?
How long your retirement income will last depends on the sources of the income you will have at your disposal.
Social security (and a pension if you are lucky enough to have one): One of the major benefits of social security is it will be paid until you pass away. At age 67 or 70 you should receive somewhere on the scale of $1,500 to $3,000 per month in social security benefits. If you take social security early at age 62, your benefit will be dramatically reduced. Head to the SSA website to begin estimating your Social Security Benefits.
401k, IRA, Brokerage Accounts, or ESOP (rolled into one of the latter): For every $500,000 in your investments accounts, anticipate approximately $1,500 to $2,000 per month in steady retirement income. So if you have $1.5 million, you should be able to generate about $3,800 to $6,000 a month before income taxes. Work with your financial advisor to confirm these amounts.
Annuity: Perhaps you have been paying into an annuity contract for 20 years, you may be able to receive a stream of monthly income when you retire. You can also buy a single premium lifetime annuity that pays you income for life and potentially to your spouse. Your financial advisor or insurance agent can help you evaluate options.
Inheritance: Each $500k of funds you inherit should generate approximately $1,700 a month in income during retirement. This assumes a 4% withdrawal rate and how long the money lasts will depend on how you invest the $500k. If you inherit or own rental real estate or a family business, your income could vary dramatically.
Use the Peak Wealth Planning Income Replacement Calculator to give yourself a full picture of what you have now and what you will continue to contribute to your investments in the years leading to retirement.
How much you have saved and your retirement lifestyle (budget) are the leading factors to determine how long your money will last. I always tell my clients to make a commitment to paying yourself first while working, be strategic in your investments, and be realistic with your budgeted spending. By doing all three, you will be able to live your retirement vision.
If you are requiring guidance on your path towards retirement, the Peak Wealth Planning team can assist.
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About the Author
Peter Newman is a Chartered Financial Advisor (CFA) and president of Peak Wealth Planning. He works with individuals nationwide that have accumulated wealth through company stock, ESOP shares, real estate, or running a business. Peter applies his unique background to help clients achieve their specific goals and enjoy peace of mind.
Peak Wealth Planning provides concierge services to meet your wealth management needs. Services include: financial planning, investment management, esop diversification, retirement income, insurance, and estate planning advice. Peak Wealth Planning is a fee-based financial advisor based in Champaign, Illinois, and Fraser, Colorado.