There are so many variables impacting your savings and trying to figure out how long your savings will last, that most people just give up and hope for the best. For example, inflation, returns on investments, company failures and success, interest rates, taxes, income, jobs, health issues and on and on. Many investment advisers use a 4% rule when it comes to withdrawing money from your savings. Four % provides a rather safe amount to withdraw and most will agree that there is an 85% chance that your savings will outlast you if you stick to 4%. However there may be other alternatives to making your savings outlast you.
The first step is to figure what your retirement income is going to me without touching your savings. Take into account pension income, government income and any other income you may have. Decide when you plan to retire and assess how much of a shortfall there is going to be relative to your salary the last year of working. Many people feel that you can live comfortably on 70% to 80% of your income in retirement without any change to your lifestyle.
Once you know the gap in income, calculate what 4% amounts to and re-assess the gap. You may have sufficient income at this point which is excellent. Next if you are short of income, you either have to go back to work, reduce expenses or take a larger amount from your savings every year. This is where it can get tricky.
Most consumers have a variable income prior to retirement, so why not after as well? If your stocks and bonds deliver more than 4% in interest, dividends and growth, consider taking more out. If it is less than 4%, then you may have to cut back that particular year. The stock market has delivered 7% on average according to many experts, but some years it delivers far more than that while in other years, the market might be in negative territory.
Recalculate you withdrawal every year and update your assumptions about income and expenses to figure out where you are relative to the income you need to enjoy your life in the manner you would like to.
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