How likely it is that your desired level retirement spending could result in a depletion of savings and financial ruin during retirement?
What is the number one financial fear for investors approaching retirement? It is not health care or inflation or nursing home costs. The number one fear is running out of money. And with good reason. With defined pension plans disappearing, individuals living longer, and investment markets becoming more volatile, it is increasingly up to each individual to manage a complex investment plan and an extended period drawing down savings during retirement. It is impossible to predict how long you will live and how well markets will perform, but it is extremely helpful to understand how much you might need to save and spend under different scenarios.
Free online tools make it simple and easy to experiment with different plans. For example using the free Portfolio Research Retirement Planner you can see how long your savings is predicted to last based on different savings levels, drawdown levels, retirement dates, and risk-adjusted investment return projections.
Let’s say your current situation is as follows:
-$50,000 in invest-able savings
-50 years old
-plan to contribute $10K to retirement portfolio until retirement
-plan to retire at age 62
We will assume you invest in a medium-risk return portfolio until retirement and a low-risk portfolio after retirement, and 2% inflation. How much can you withdraw from your nest egg without running out of money? In this case, trying to live on a modest $25,000 per year from your savings appears precarious, with a 50% expected probability your portfolio will be depleted by around the age of 72.
However if your plan is to work until 67 your savings have a 50% likelihood to last until the age of 82. Then if you also increase the risk level of your portfolio prior to retirement (essentially investing in more stocks and other higher risk, higher return assets) your nest egg has 50% probability to last until you are 84; and if markets perform well the portfolio will not run out until after the age of 100. But if markets perform poorly it will be depleted by around the time you are 75.
The scenarios above of course are quite simple and merely designed to give you a sense of the significant impact adjusting variables can have on your lifestyle for years to come. The order of withdrawal amounts and the timing of market fluctuations can have a dramatic impact on these scenarios. Experimenting with different scenarios can help you with saving and spending goals and selecting the level of investment risk you are willing to take.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.