Retirement Withdrawal Calculator
This calculator figures the amount of retirement savings you need in order to withdraw a specified amount each month over the course of a specified period of time. You also have the option of factoring in the effects of inflation.
Please note! This calculator assumes simple interest returns and should not be confused with Safe Withdrawal Rates on a diversified portfolio as fully explained here.
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Retirement Withdrawal Calculator Insights
There are two sides to the retirement planning equation – saving and spending.
The asset accumulation phase (saving) leads up to your retirement date followed by the decumulation phase where you spend down those assets to support living expenses in retirement.
The truth is retirement income planning is one of the most complex and controversial aspects in financial planning. There are so many different models with each being dependent on the investor’s portfolio assets and risk tolerance.
In short, there is not sure-fire solution to retirement income planning that solves all problems. Each strategy results in tradeoffs between risk and required income goals. No single retirement withdrawal calculator can model all spending alternatives effectively.
For these reasons, this retirement withdrawal calculator models a simple amortization of retirement assets. It is the simplest, most straightforward of all possible models by emulating a fixed income (bonds and cash) portfolio with a progressive amortization of principal until all the assets are spent. It provides a baseline understanding for retirement distribution and is your best starting point for modelling what is reasonable.
It answers the question, “How long will my assets last given a fixed interest, investment return that never goes through market fluctuations or loss of investment principal?”
Retirement Spending Calculator Required Assumption
The second most important assumption to your retirement spending calculation (after investment strategy) is your budget requirement. Your budget determines how much you will spend each month and also determines how much money you must save to support that spending.
Conventional wisdom claims you should plan to save enough money to replace 60 percent to 80 percent of your working income in retirement. Again, this assumption is fraught with controversy.
Early retirees frequently increase spending to support an active lifestyle of travel, hobbies, and personal interests. Other retirees have much less expensive retirement interests and require less spending.
In short, rules-of-thumb are just rough guidelines. Instead, look closely at your plans for retirement before placing a spending assumption based on your actual plans in the retirement withdrawal calculator. Try to make it as accurate as possible by reflecting your personal plans instead of a blind rule-of-thumb.
Finally, don’t forget to take into consideration inflation on spending and distributions because inflation can have a dramatic, long-term, compound effect. With that said, research shows the average retiree spends roughly 25% less (in nominal terms) with each progressive decade of retirement following age 65 thus largely offsetting inflation and making a static spending estimate surprisingly reasonable.
How Much Can You Spend From Your Savings?
The goal of a retirement withdrawal calculator is to figure out how much you withdraw from savings without running out of money before you run out of life. Not an easy task! This is a very tricky calculation, since you don’t know what you’ll earn in any given year, nor what the rate of inflation will be, nor how long you’ll live.
Conventional wisdom in retirement planning claims a conservative withdrawal rate should be 4% annually adjusted for inflation. Reputable sources argue this is too aggressive during periods of low interest rates and/or high market valuations thus advocating a more conservative 3% annually adjusted for inflation.
You can decrease the risk of spending more than your assets can support by recalculating your withdrawals annually based on your current savings and investments balances. By implementing this strategy your spending levels will vary annually introducing some uncertainty, but you will also dramatically increase the chances that your savings will last at least 30 years.
Making Your Retirement Savings Last
One of the most important keys to making your retirement savings last is to set a budget in retirement. You need to strictly stick to your budget since you are living on a fixed amount of money during retirement.
If you find your your savings are not sufficient to support your current budget then here are some additional strategies to stretch your retirement savings.
Retirement Withdrawal Calculator Terms and Definitions:
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