How long will my money last in retirement?
It seems like a simple question, but you’ll get a variety of answers depending on who you ask.
Today, I’ll show you how you can easily and accurately answer this question for yourself by using freely-available retirement calculators — no matter what your knowledge of financial planning is.
Take Control of What You Can
Retirement investing and planning is complex. The number of variables involved is in the hundreds. And many of those factors are out of your control, such as how long you’ll live, inflation, tax rates, and the performance of global financial markets.
Given that, it’s important to understand that the question “How long will my money last?” isn’t one with a clear or absolute answer. No financial planner can look over your accounts and tell you, “It’ll last 22.4 years.”
Instead, the answer comes in the form of a probability.
For example, I might be able to examine your financial life and tell you that, based on your current asset allocation and withdrawal rates, there’s an 85% chance your money will last 25 years.
The goal of this article is to help you:
- Learn about the most likely outcomes based on your current assets and living expenses (including both investment assets and social security).
- Learn whether your current portfolio is allocated to maximize returns, given the level of investment risk you’re willing to accept.
- Learn whether your withdrawal rates need to be adjusted.
While there’s a lot of numbers involved, I’ll show you an easy way to get the necessary data for free in minutes.
The Problem With Basic Retirement Planning Calculators
Dozens of websites offer free retirement withdrawal calculators.
Here’s an example of a basic retirement calculator, which has the goal of answering the question “How long will my money last with systematic withdrawals?”
What you learn here is that with $500,000 in assets, monthly withdrawals of $3,250, and a 5% rate of return, your money will last 18 years.
But if you take a closer look, there are some big red flags here:
- The calculator assumes an 8% flat rate of return. As most people know, investments don’t have a consistent 8% rate of return. Instead, they may go up 8% one year, up 25% the next, and down 3% the year after. This can have a major impact on your savings balance.
- The calculator assumes a flat withdrawal amount (or flat increase).
- There’s no room to adjust your retirement plan. A lot can and will change during retirement. Will your assets increase due to an inheritance? How will a planned sale of a property and the subsequent downsizing impact your investments? There is an infinite number of variables that could come into play.
While many events are out of your control, there are many others that are not. And how you manage those controllable factors will significantly impact how long your money will last.
The key takeaway is that nobody has a crystal ball. We don’t know what inflation will look like. We don’t know the future of the financial markets. We don’t know what your life expectancy is.
With all of that in mind, you’ll want to do a lot better than a basic retirement income calculator.
A More Advanced Retirement Planning Calculator
A better way to calculate how long your money will last is to use rolling historical time periods (a.k.a. rolling averages).
This allows you to measure how your portfolio would have performed across multiple time periods in market history.
For example, say you have a 60/40 mix of stocks and bonds, and your time horizon is 30 years. Using rolling historical time periods, you can see how your portfolio and withdrawal strategy would have performed in every 30-year market cycle, such as 1955-1985, 1965-1995, and so on.
The basic version of the calculator allows you to enter your annual expenses, spending rates, and the number of years you’re looking for your money to last.
You’ll then get the probability, based on every market cycle, of whether you’re in line to meet that goal.
For example, say I insert:
- Spending: $39,000 per year, or $3,250 per month
- Portfolio: $500,000
- Years: 18
FIRECalc analyzes how this portfolio performed over 131 possible 18-year periods in market history.
What we learn is that out of the possible 118 scenarios, there would be 52 times that the above portfolio would have run out of money.
The more advanced version of the calculator, which can also be accessed for free and without signing up, allows you to adjust for variables like inflation and asset allocation, and add lump sum changes to your portfolio.
This data is very useful. And if you’re looking for some quick, basic hypothetical illustrations, FIRECalc is worth checking out.
All that being said, it’s still not my preferred way to calculate how long someone’s portfolio will last, because there’s a big limitation to using historical returns: they only take into account past performance.
And while the market has been around for over 100 years, this is actually a pretty small sample size. For example, we have yet to see five years of consecutive losses for the S&P 500. (The longest annual losing streak so far is four years.)
Will that change?
I’m not sure, but I’d like to know how my portfolio would respond if it did.
Using Monte Carlo Simulations to Test Systematic Withdrawal Rates in Retirement
A Monte Carlo simulation tests the probability of your existing portfolio surviving regular withdrawals over a particular period of time. What this looks like is testing your portfolio and expected withdrawals against thousands of random simulations based on past market performance.
Monte Carlo simulations show more volatility than historical returns because each year is an independent variable of another. For example, in a Monte Carlo simulation, one simulation will inevitably run that has five consecutive down years.
As such, with Monte Carlo simulations, you’re actually overstating market downside (as well as upside).
In the end, a proper Monte Carlo simulation can help you best determine:
- How long, on average, your retirement savings will last based on your current financial situation. Ideally taking into account as many variables as possible, including social security benefits, planned withdrawal increases/decreases, your federal marginal tax bracket, your asset location (e.g., Roth IRA vs. traditional), etc.
- Your safe withdrawal rate. This is the amount you can withdraw from your retirement savings each year and not worry about running out of money. This is determined by looking at today’s withdrawal rate and adjusting each year for inflation.
The Best Free Monte Carlo Simulator
Far and away my favorite online financial calculator to help you run Monte Carlo simulations on your portfolio is the Empower Retirement Calculator.
Here’s what I like about the free tool:
- Simulation. It calculates investment returns by running 5,000 simulations from different time horizons. It then gives you the likelihood of a successful retirement — that is, the likelihood that you won’t run out of money — as a percentage.
- It uses real data. It pulls your actual income, expenses, and current portfolio — not your estimates.
- Customization. Not all calculators allow you to insert variables such as college savings, changes in retirement income, and social security. You could test hundreds of different scenarios with Empower’s retirement income planner. For example, “What if I increase my savings by 10% a year?” or “What if I take a part-time job that pays $15,000 per year during retirement?”
Along with the more advanced data, you’ll get a simple probability figure showing how well your current portfolio would perform, based on market averages. Here’s what mine looks like:
What I also like about Empower is its Investment Checkup tool. Using the tool allows you to gather additional important data on your portfolio. My favorite feature is the risk and return analysis, which measures where your portfolio is on the “Efficient Frontier” (which is explained in the video below).
As far as what this looks like, here’s what Empower allows me to see:
Getting Started on Empower
FIRECalc is one man’s passion project to help others for free. Empower, on the other hand, is a for-profit investment institution.
Yes, they offer some of the best free financial software available. But they also offer wealth management services.
In a sense, they operate as many high-tech companies do: by using the “freemium” business model. That means their software is free — you can download the app at no cost and use the free tools they provide.
That’s what the majority of people do… including me.
It works similarly to many other budgeting apps:
- You get started by signing up on your smartphone
- Once you’ve created your account, Empower asks you to sync your current accounts, such as your investments, 401(k), credit cards (as it has a budgeting feature), and checking and savings accounts.
Once your accounts are synced, you’ll have access to all of Empower’s free tools. If you’re interested in learning more, read our full Empower review.
Summary: How Long Will My Money Last?
Figuring out your monthly income and how long your money will last in retirement is a complex calculation. But with the help of freely-available software, it becomes possible to have a realistic look at how your portfolio will fare.
But there are some shortcomings to the DIY method, mainly because every financial situation is unique. There are variables like life insurance, capital gains taxes and unexpected changes in income (among many others) that can’t be easily considered by financial software.
If you’re finding yourself with more questions than answers, you may want to find a local fee-only financial planner; ideally, a CFP® Professional who specializes in retirement planning.