Retirement may seem like an abstract, futuristic concept — the flying car of personal finance. Or maybe it's not abstract to you. At. All. If you've been diligently saving, it's probably something you’re looking forward to. And if you haven't been saving, it might be something you're looking at with trepidation. Either way, there's one big unknowable when it comes to retirement money: how long you'll need it.
Calculating how long retirement savings last
There's no sure way to calculate how long your retirement savings will last. There are a lot of different factors that affect the longevity of your retirement savings, they include interest rates, inflation, your investment returns, the cost of living, your lifespan and more. That said, one way to get a rough estimate of how long your money will last you in your golden years is to first do some simple math. Here are two things you are going to need in order to make the simple calculation:
Your total retirement income (the savings/income you plan to have upon retirement) Add up all your total retirement savings plus the annual returns you’re getting on your investments. Don't forget to include all your retirement income. Keep in mind that certain government benefits start kicking in after a while, so don’t forget to add those in as well. At 65, for example, you’ll start collecting Old Age Security pension (OAS). How much you receive depends on how long you’ve lived in Canada. 65 is also the age when your Canada Pension Plan (CPP) benefits start kicking in.
You're annual expenses (in retirement). When you are adding up your expenses, be sure not to leave anything out. Think mortgage payments or rent, monthly groceries, insurance, and the occasional “treat yourself” splurge (you’re supposed to be enjoying your retirement, after all).
To make the calculation simply divide your total retirement income (one above) by your total annual expenses (two above). The answer is an estimate of how many years that your retirement savings will stretch out. There's no way to guarantee your retirement savings will last will last this long, but it's a decent forecast to help with planning.
Most experts advise that you should plan to have your retirement money last you about 30 years, given today’s average lifespans. If you make the calculation and get a number below thirty it might be time to consider saving more for retirement or cutting down on your retirement expenses. It's worth noting that the calculation does not take into account additional income your savings could make should you invest that money over the course of your retirement.
Once you have a rough estimate of how much you’ll need each year and how much your savings, investments, and retirement plans will give you, it’s time to figure out how much you should be taking out of your retirement savings every month. The most commonly cited figure here is the four percent rule.
The four percent rule for retirement savings
Basically, the four percent rule states that you take out four percent of your savings each year and use that for your living expenses. According to the rule, you can enjoy a steady income through retirement for up to thirty years.
Why four percent? It was believed that withdrawing more could leave you more vulnerable to market crashes and eat at your money much quicker. This means that you could possibly outlive your savings. Of course, the four percent rule doesn't automatically guarantee you'll always have enough for your retirement; it just highly increases the likelihood that you won't run out of money. That's a scary thought, which is why it's important to tailor your retirement strategy to your specific lifestyle and capital.
The four percent figure was created by financial planner William Bengen and dates back to the early 1990s. He studied historical data from stock and bond returns dating back to 1926, including the big market crashes of 1929 and the 70s. Bengen concluded that a four percent withdrawal rate was a stable bet that accounted for the possibility of a volatile market.
It’s important to remember that the four percent rule doesn’t just mean that you’re going to be withdrawing four percent from your nest egg for the rest of your life. That’s probably only going to be the case for the first year of retirement. After that, you may need to adjust those four-percent withdrawals to current inflation rates so that you maintain purchasing power. Something to keep in mind is that you won't see the entire 4% of the income you withdraw. Although your tax rate might be lower in retirement, you'll still have to pay some taxes and you should be prepared for this.
While the 4% rule does not guarantee that you’ll have money through retirement, it does aim to provide a consistent income for 25-30 years. The term “rule” is a little misleading since this should be considered more of a guideline (with you making concessions for inflation or for changes in investment returns).
If you invest in a diversified investment portfolio that yields an annual return, then your money will continue to make money in your retirement. In order for that to happen, you'll likely need to start investing rather than saving. Even high yield savings products generally return less than 2% — that's a figure likely to be outpaced by inflation. It's a fine place to keep your emergency fund but probably not the ideal place for your retirement savings.
How long will $300,000 last in retirement?
So let’s say that you’ve got $300,000 saved up and you withdraw 4% per year, that sum alone will probably last you about 25 years. That's if you left it sitting in an account that provides no return at all. Withdrawing 4% per year would mean your yearly withdrawals would be $12,000. That’s probably not enough to live on, unless you have additional income or if you own your own home.
Your funds have the potential to last much longer though. That's because that sizeable sum also has a chance to increase in value over the course of your retirement if you're willing to invest or save it. Some savings accounts come with guarantees meaning at least some of your money is “safe” but with investing there are no guarantees as investments rise and fall.
Investing money in a portfolio with high yields will mean you're getting more out of your money than most savings accounts. Historically, the stock market (S&P 500) has provided an average return of 7% per year. That's not to say it will provide the same returns going forward though. The returns could be better or they could be worse, but historically speaking, this has been the return.
There are plenty of calculators online that let you plug in your total savings, monthly withdrawals and what average returns your portfolio is yielding. They'll then provide an estimate of how long your money will last. According to this calculator, a portfolio with a seven percent return, for example, will mean you’ll be able to withdraw about $1,900 a month ($22,800 a year) and have your money last about 33 years at that rate. Again, this isn’t accounting for any government benefits or any other retirement income you may have.
The more you invest before you retire and the sooner you invest, the more you'll stand to have for your retirement. That's why we say that the best time to start planning for retirement is right now, you'll be giving your money more time to make money. Using a compound interest calculator you'll see that had you invested $300,000 ten years before you plan on retiring, at an average annual return of 7%, your money would have almost doubled. You'd have $590,145.41 to be more precise.
How long will $500,000 last in retirement?
If you've saved $500,000 for retirement and withdraw $20,000 per year, it will probably last you 25 years. Of course, it will last longer if you expect an annual return from investing your money or if you withdraw less per year.
If you have $500,000 saved up, then you’re able to withdraw more each year compared to having $300,000. If you manage to stick to withdrawing $20,000 per year ($1,666 a month) you'll be withdrawing 4% of your savings per year.
This might be enough income for some, but if you are hoping to withdraw more each month you'll likely have to dip further into your retirement savings or invest that money in the hope that it will increase in value. In the past had you invested in the stock market in the past (S&P 500) you'd have gained a return to the tune of 7% per year. Use a calculator like this one and you'll find that you could have withdrawn $3,250 a month and had your retirement savings last thirty years and two months.
How to make your retirement savings last
Start saving for retirement
Obviously, the best way to make your savings last as much as possible is to start saving, now. If you are already saving, consider saving more! You'll build a more solid nest egg for retirement if you start investing early. Auto-deposit a certain amount of income each month into a retirement account. If you can, strive for double digits — that's over 10% of your income going to retirement. At very minimum invest enough that allows you to avail of an employers pension matching if they have such a scheme. The sooner you start thinking about retirement, the sooner you’ll be able to get started on writing that novel, joining the bridge club, or even eyeing that beach house.
All successful savings plans start with a budget, so start thinking about what your monthly expenses are, and estimate a reasonable income based on your different income sources and projected savings. If you think you’ll be able to live within that budget during retirement, then proceed! But if that budget seems like it’ll make your golden years anything but golden, it’s time to strategize.
The best way to increase your future budget is to decrease your current one. Save now on things like going out to eat, fancy coffees, that deluxe cat tree house that your cat will ignore for the box it came in any way, etc. While it may seem hard to deprive yourself now, just think of how happy you’ll be that you don’t have to tighten the belt 30 years later. Enjoy life — but save for retirement while you do.
Retire later in life
Another great option for saving? Put off retirement for as long as you can. That way you’ll still be earning an income and can let your retirement savings further accumulate interest. It also means that once you do retire, you’ll be able to have more money to spend during those years.
The ideal retirement looks different for everyone. Some just want to be able to finally take up fly-fishing, and just take it easy. But for other people, the idea of giving up a professional endeavour completely can seem disorienting and ominous. In that case, the part-time consulting gig, teaching stint, or whatever else your talents qualify you for are a great option to stave off existential angst—and also bolster your income.
Downsize your home
By the time you retire, your family probably won’t be as big as it was before. If you have kids, they’re probably already grown and out of the house. So if you’re looking to stretch your savings, it can be a good idea to sell the house and look for something smaller (and cheaper). In fact, you might want to consider renting. You won’t have to deal with a mortgage anymore, and don’t have to deal with any maintenance or repair issues that can suck up a lot of money and time.
If all this talk of retirement has you feeling a bit anxious, know that even small changes to your saving and investment habits are a great place to start. Speaking of starting — why not start getting retirement ready with Wealthsimple. We’ll create a personalized investment portfolio tailored to your specific financial goals and risk tolerance plus provide all the advice and help you need along the way. Get started investing for your retirement today with Wealthsimple.
