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The simplest way to estimate how long your money will last in retirement is to weigh your total savings, plus investment returns over time, against your annual expenses. Try our calculator to get your estimate:
However, figuring out how many years your retirement savings will last isn’t an exact science. There are many variables at play — investment returns, inflation, unforeseen expenses — and all of them can dramatically affect the longevity of your savings.
» Planning for retirement? Here’s a 5-step guide to get started
How to make your savings last longer
You may be able to stretch your retirement savings further with some common retirement withdrawal strategies. Here are three to consider.
1. The 4% rule
This approach is simple: You take out 4% of your savings the first year, and each successive year you take out that same dollar amount plus an inflation adjustment. For example, if you’ve saved $1 million, you’ll spend $40,000 in the first year after you retire.
This rule is based on research finding that if you invested at least 50% of your money in stocks and the rest in bonds, you’d have a strong likelihood of being able to withdraw an inflation-adjusted 4% of your nest egg every year for 30 years (and possibly longer, depending on your investment return over that time).
William Benger, who published these findings in 1994, tested his theory across some of the worst financial markets in U.S. history, including the Great Depression, and 4% was the safe withdrawal rate .
However, the volatile stock and bond markets in the post-pandemic world could make this strategy less effective, according to Morningstar's 2022 State of Retirement Income report . Financial planners will likely be keeping an eye on this strategy in the coming years to monitor its effectiveness.
2. Dynamic withdrawals
The 4% rule only adjusts for inflation and doesn’t take other factors into account. Methods called “dynamic withdrawal strategies” may help you respond more appropriately to a changing market — and to your changing needs.
With a dynamic withdrawal strategy, you’ll change your withdrawal amount in response to investment returns. This means the amount you’ll be able to spend depends on how the market is performing.
There are many dynamic withdrawal strategies, with varying degrees of complexity. You might want to consult a financial advisor to set one up.
» Looking for a financial advisor? These are our top picks for this month
3. The income floor strategy
The income floor or “flooring” strategy helps you control how long your money will last by making sure you don’t have to sell stocks when the market is down. That way, you always know your basic expenses are covered — you can use your invested savings for discretionary expenses.
Here’s how it works: Figure out the total dollar amount you need for essential expenses, such as housing and food, and make sure you cover those expenses with guaranteed income, such as Social Security, plus a bond ladder or an annuity .
Although some annuities are overpriced and risky, using the right one can be an effective retirement-income tool — you fork over a lump sum in return for guaranteed payments for life. In the right circumstances, even a reverse mortgage might work to shore up your income floor.
Not quite ready to retire?
If you’re still a few years away from leaving the workforce, using a retirement calculator is a great way to gauge how changes to your savings rate will affect how long your money will last.