How long will your retirement savings last?
Of course, no one can predict how long you’ll live. But I can tell you that given today’s long life spans, it’s prudent to plan as if you’re going to be around quite a while. Otherwise, if you base your spending on the assumption you’ll live a short life and end up living longer, those extra years you didn’t think you’d be around for may not be so enjoyable.
People can quibble about how many years retirees should plan for their savings to support them. But I’d say the consensus is that to reduce the risk of depleting your assets too soon, you should plan as if you’ll live at least into your early 90s, and couples should plan as if one of them will be around even longer. I suggest age 95 as a reasonable starting point for planning purposes. If you have a compelling reason to believe you’ll die sooner, you can adjust that figure downward (although I’d do so with caution) and if longevity runs in your family, you might tack on a few more years just to be safe.
You don’t say how old you are, how much you’re spending, how large your nest egg is or how you have it invested. But just so we can run through an example, let’s assume you’re 65 and have $500,000 in retirement savings, 50% of which is in stocks and 50% in bonds. Let’s also assume that this year you’ll spend 4%, or $20,000, of your nest egg, that you’ll increase your spending by the inflation rate each year to maintain purchasing power and that you want your savings to last at least 30 years, or in this example until age 95.
If you plug that information into the T. Rowe Price retirement income calculator — a tool that uses “Monte Carlo” simulations to forecast the probability that a given level of spending can be sustained — you’ll see that the calculator estimates there’s an 80% chance that you’ll be able to maintain the spending regimen described above for 30 years. Or, to put it another way, if you withdraw 4%, or $20,000, from your nest egg this year and increase that amount by inflation each year, there’s about a 20% chance you’ll run through your savings before you reach age 95.
There’s no official consensus about what is considered an “acceptable” level of assurance. But I’d think that most retirees would want to have at least an 80% or so chance of their savings being able to support them for life.