Determining How Long Your Savings Will Last in Retirement
One key component of planning for retirement is figuring out how low long your savings will last once you retire. Running out of money in retirement is a major concern for many investors, and justifiably so – nobody wants to outlive their income.
As a result, when drawing up your financial plan it makes sense to calculate how long the savings you expect to amass prior to retirement will last once you do retire. If the numbers fall short, and your savings don’t appear to be able to support your planned expenditures in retirement, you can use this information to make changes to your plan. These changes could involve setting aside more funds for retirement or otherwise altering your retirement plans.
For example, downsizing your living quarters or moving to a location with lower living expenses, among other options.
The risk of outliving your income is known as longevity risk, and as advances in health and nutrition have increased average lifespans, the risk of outliving your income has also grown.
While life expectancy tables can provide information about average expected lifespans for people your age, your lifespan may diverge significantly from the average, making their use problematic when trying to determine how long your savings will last in retirement.
Another factor that can make it difficult to figure out how long your savings will last in retirement is the difficulty that can accompany projecting investment returns. Your money will obviously last a lot longer in retirement if your investment returns or rate of interest are high, and the opposite if they are low.
These uncertainties make it advisable to err on the side of caution when estimating how long your retirement savings will last. Various online sources can be used to help in calculating the length of time your savings are expected to support you during retirement. After determining the rate of return you expect your savings to earn, a retirement savings withdrawal calculator can help you figure out the length of time your savings are expected to last at a given rate.
Another method of determining how long your savings might last in retirement is to readjust your withdrawal amount each year depending on your life expectancy and your portfolio value. This avoids the danger of sticking to a specified withdrawal percentage only to find that your investment returns have underperformed your expectations, causing you to exhaust your savings earlier than expected. A life expectancy calculator can be used to determine the amount you can withdraw on a yearly basis using this approach.
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Samuel Rad is an award winning fee-based Financial Planner with Affluencer Financial Advisors in Los Angeles, California. Mr. Rad has multiple licenses in the investments, real estate, and insurance fields. He has spent a considerable amount of his career lecturing at universities and companies, on financial topics such as financial planning, retirement planning, and estate planning.
He currently lectures at UCLA and West Los Angeles College.