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 assumptions chosen, portfolio assets, and risk tolerance.
- For example, dividend growth stocks have the potential to provide inflation adjusting income and capital growth, but they will also deliver increased volatility and risk of permanent loss in the wrong market conditions.
- A bond portfolio will provide stable, reliable income, but the income and assets will erode in purchasing power over time due to inflation.
- Traditional fixed annuities (SPIA or single premium annuity) can provide a floor of reliable income that you can never outlive and a potentially higher safe withdrawal rate than bonds or stocks alone can provide, but the downside is loss of liquidity and a potentially smaller estate for your heirs.
In short, there is no 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.
Related: How Your Financial Advisor is Taking 75% of Your Retirement Income (or More!) Video, PDF download, or Audio.
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.
- Manage your investment accounts carefully. You can stretch your retirement income by proactively managing your investment accounts and savings, which means understanding how they produce income over time and what risks they carry.
- Live a healthy lifestyle. By eating healthy and exercising, you can cut down on out-of-pocket medical expenses substantially. Out-of-pocket medical expenses can eat away at your assets significantly as you get older.
- Evaluate your expenses. Look seriously at your overall lifestyle – how are you spending your money? Many people spend money almost unconsciously, making impulse purchases with no awareness where their money is going. Once you’ve tracked your expenses for a full calendar year, you’ll be better able to predict patterns and understand which budget changes you need to make.
- A major perk of growing older is qualifying for senior discounts. Some businesses clearly list senior discounts on their website or post them in the store. Other businesses provide discounts only to seniors who ask for them. So wherever you are doing business, ask whether there is a senior discount available.
- Review your investments periodically. You need to review annually your investment accounts to make sure they still align with the original plan so that you can make adjustments to accommodate your changing needs.
Need more help in figuring out how much money you'll need in retirement, and how to build that wealth to achieve retirement? Our course shows you how to lay the foundation and framework for financial independence so you can start living according to your values.
Related: 5 Rookie Financial Planning Mistakes That Cost You Big-Time (and what to do instead!) Explained in 5 Free Video Lessons
Retirement Withdrawal Calculator Terms and Definitions:
- Expected Retirement Age – This is the age at which you plan to retire.
- Amount You Expected to Withdraw – This is the budgeted amount you will need to support your personal needs during retirement.
- Annual Interest Rate – This is the annual rate of return you expect to earn on your retirement savings over your remaining lifetime.
- Life Expectancy – The number of years you would like to make the monthly withdrawals.
- Inflation – The upward price movement of goods and services in the economy.
Related Retirement Calculators:
- Ultimate Retirement Calculator: It's called the ultimate retirement calculator because it does everything the others do and a whole lot more.
- Simple Retirement Savings Calculator: How long will it take me to reach my retirement savings goal given my current savings balance and my monthly deposits? Solves for time.
- Retirement Investment Calculator: How much investment should I make each month to reach my desired retirement savings goal given my current savings balance and expected retirement date? Solves for amount to invest.
- Millionaire Calculator – How To Retire A Millionaire: So you wanna be a millionaire? This fun calculator will tell you when it will happen and what a million dollars will be worth by then after adjusting for inflation.
- How To Save Money For Retirement – The Easy Way!: If you have problems saving for retirement then this calculator will show you an easy way.
- 401k Calculator: If I deposit a certain amount in my 401k each month what will it grow to by any future point in time?
- 401(k) Early Withdrawal Calculator: What is the financial cost of taking a distribution from my 401(k) or IRA versus rolling it over into another tax deferred account?
- Taxable vs. Tax Deferred Investment Growth Calculator: How will my future value and investment return differ between taxable and tax deferred investing?
- Interest Calculator – Simple & Compound Interest: Compares simple monthly interest income to long term compound growth for surprising results.
- Roth IRA Calculator: What is the after tax impact of switching from a traditional IRA to a Roth IRA?
- Present Value of Annuity Calculator: What is the present value of a series of equal cash flows to be received in the future?
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