How to Plan To Make Retirement Savings Last

Money 2000 and Beyond A common concern of retirees is outliving their income. Many people are unsure about how much income to withdraw each month to supplement their pension and/or Social Security. They are afraid to take "too much" lest they live to a ripe old age. Tables exist in many personal finance books to assist with retirement withdrawal decisions. These tables show the number of years that a sum of money will last with a given rate of return and rate of withdrawal.

There are two key points to remember:
  1. If you withdraw money at an annual rate that is less than your rate of return, you will never deplete your principal (for example, if you withdraw 5% (1/20) of your retirement fund annually and it is earning 7%). This takes some planning and aggressive investing (i.e., more stock in your portfolio) over a decade or more to achieve but is important if you want to be sure not to outlive your assets or leave an inheritance or charitable donations.
  2. If you withdraw money at an annual rate that is more than your rate of return, you will eventually run out of money. The table below from Bruce Webber, Inc. shows how long $100,000 will last given the withdrawal of constant monthly income amounts. The illustration assumes a 4% annual inflation rate and shows rates of return ranging from 6-11%. The period over which money will last is shown in years/months.
 

                                     Rates of Return 

                         6%      7%     8%     9%     10%    11% 

   Monthly Income                       Period in  

(Inflation Adjusted)                 Years/Months 

      $  500           20/7    23/3    27/3   34/4   56/0   forever 

      $  600           16/6    18/2    20/4   23/5   28/5   40/0 

      $  700           13/10   14/11   16/3   18/0   20/6   24/3 

      $  800           11/10   16/3    13/7   14/9   16/2   18/2 

      $  900           10/5    11/0    11/8   12/6   13/6   14/9 

      $1,000           9/3     9/9     10/3   10/0   11/7   12/5

Many people are living longer in retirement, perhaps as long as 40 years (e.g., age 55 to 95). Thus, longevity is a major concern. If the number of years that money will last is less than you would like (or your life expectancy), consider increasing the yield of your investments or making smaller withdrawals.

This message is sponsored by Rutgers Cooperative Extension. For further information about available educational programs and other services, contact your local Rutgers Cooperative Extension office.

  1. Rutgers
  2. Executive Dean of Agriculture and Natural Resources
  3. School of Environmental and Biological Sciences