The duration of retirement savings
Once you get an idea of how long the money needs to last, the next step is to work out how long your money can potentially last.
The table below illustrates, for any particular amount of retirement savings, how long the money might last assuming a constant annual drawdown amount based on a percentage of starting balance (left hand axis) and a constant annual earning rate net of taxes and fees (top axis).
For example, let’s assume Bill has accumulated savings of $200,000 when he retires at age 65. If he withdraws 10% of the starting balance each year (ie $20,000) (along vertical axis) and earns a net return of 4% each year (along horizontal axis) he can expect to run out of money early in the 14th year. Even if Bill earns 6%, the money is expected to be fully depleted during the 16th year.
Table 2 – How long before my savings run out ?
| Effective Earning Rate % | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 |
| Drawdown % | ||||||||||
| 5 | 22.43 | 25.80 | 31.00 | 41.04 | ||||||
| 6 | 18.32 | 20.48 | 23.45 | 28.01 | 36.72 | |||||
| 7 | 15.49 | 16.99 | 18.93 | 21.60 | 25.68 | 33.40 | ||||
| 8 | 13.42 | 14.53 | 15.90 | 17.67 | 20.10 | 23.79 | 30.73 | |||
| 9 | 11.84 | 12.69 | 13.72 | 14.99 | 16.62 | 18.85 | 22.23 | 28.55 | ||
| 10 | 10.59 | 11.27 | 12.07 | 13.02 | 14.21 | 15.73 | 17.79 | 20.91 | 26.72 | |
| 11 | 9.58 | 10.13 | 10.77 | 11.52 | 12.42 | 13.53 | 14.95 | 16.88 | 19.78 | 25.16 |
| 12 | 8.74 | 9.21 | 9.73 | 10.34 | 11.05 | 11.90 | 12.94 | 14.27 | 16.09 | 18.80 |
| 13 | 8.04 | 8.44 | 8.88 | 9.38 | 9.95 | 10.62 | 11.43 | 12.42 | 13.68 | 15.38 |
| 14 | 7.45 | 7.78 | 8.16 | 8.58 | 9.06 | 9.60 | 10.24 | 11.01 | 11.95 | 13.14 |
| 15 | 6.93 | 7.23 | 7.55 | 7.91 | 8.31 | 8.77 | 9.29 | 9.90 | 10.63 | 11.53 |
| 16 | 6.49 | 6.74 | 7.02 | 7.33 | 7.68 | 8.07 | 8.50 | 9.01 | 9.59 | 10.29 |
| 17 | 6.09 | 6.32 | 6.57 | 6.84 | 7.14 | 7.47 | 7.84 | 8.26 | 8.75 | 9.31 |
| 18 | 5.74 | 5.95 | 6.17 | 6.41 | 6.67 | 6.96 | 7.28 | 7.64 | 8.04 | 8.51 |
| 19 | 5.43 | 5.62 | 5.81 | 6.03 | 6.26 | 6.51 | 6.79 | 7.10 | 7.45 | 7.84 |
| 20 | 5.15 | 5.32 | 5.50 | 5.69 | 5.90 | 6.12 | 6.37 | 6.64 | 6.94 | 7.27 |
This analysis does not take into account price inflation nor does it take into varying income needs or volatile investment performance and variable earnings. These factors could cause the money to run out even earlier.
Clearly, having more money to start with is the desirable retirement strategy but a good strategic plan and regular monitoring and review of your outcomes against this plan (both before and after retirement) are also important.
Once we know how long the money we have can potentially last, we can start thinking about how we could make it last longer.
This information is, of course, general in nature and it is important to seek specific retirement planning advice to comprehensively address issues of risk, return and volatility.
