Most financial and retirement planning efforts focus on analyzing how much money you will need at retirement or want to accumulate by a particular date. If you save enough on a regular basis and earn some level of returns, your funds will grow to a certain level over a specified period of time. This can be as simple as compound interest.
However, there is another, often ignored, aspect of planning for a financially secure future. What happens as you withdraw money? How long will my money last? The important elements of the answer to these questions are the level of withdrawals and the earnings rate on the funds.
In general, if you withdraw less than what you are earning, your funds will last forever. If you withdraw more than you are earning, at some point you will deplete your assets.
Following is a chart showing how many years your money will last at different withdrawal rates and different earnings rates. The chart assumes that the level of withdrawals increases at 4% per year (to cover increasing costs of living) and shows how long your money will last at different rates of return on your money.
| How many years will your money last? | ||||
|---|---|---|---|---|
| First year withdrawal rate | Earn 4% | Earn 6% | Earn 8% | Earn 10% |
| 2% | 50.0 years | Forever | Forever | Forever |
| 4% | 25.0 years | 33.5 years | 69.0 years | Forever |
| 6% | 16.7 years | 19.8 years | 25.4 years | 42.8 years |
| 8% | 12.5 years | 14.1 years | 16.5 years | 20.4 years |
| 10% | 10 years | 11.0 years | 12.3 years | 14.1 years |
For example, let's assume you have accumulated $250,000 when you retire at age 65. If you start withdrawing 10% ($25,000) per year, assuming your withdrawals increase at 4% per year (a good guess for inflation) and you earn 4% on your money, you will run out of money at the end of ten years. Even if you earn 8%, the money will be depleted just after the twelth year.
Using the information in this chart can help give you a better understanding of what it will take to afford a financially secure retirement. However, it is not the whole picture. You must also remember that you will probably receive Social Security retirement benefits and pay income taxes.
There are two important messages to learn from this chart:
- Once you start withdrawing money from what you have accumulated, the rate at which you withdraw is more important than the earnings rate.
- It is important to have accumulated a significant amount of money before you start needing it so the amount you withdraw each year is a small portion of it.