Notes From the Fieldby Martin Weil

January 31, 2014

Q: I am 54 with $1M. How long will my money last?

Martin's Answer:

The standard advice is that you can draw between 3-5% per year from an invested portfolio and have that portfolio last 30 years.  There is much debate over what is a “safe” sustainable withdrawal rate but most studies conclude that a 4% draw will survive whatever the markets throw at you over a 30 year period.  In your case that would mean $40K a year, increased annually only by inflation.

There are multiple calculators (search “How long will my money last”) that will give you a straight line estimate for different withdrawal rates.  These are helpful guides but are far from definitive.  The reality is that an investment portfolio of any sort will increase and decrease in value and these unpredictable fluctuations can have a dramatic impact on how long your money will actually last.  The more aggressive the investment portfolio, the more volatile your range of outcomes.  More upside to how long the money lasts, but also more downside.  Generally this is why individuals who are relying on a portfolio to support their current ongoing needs are best advised to invest in a low risk portfolio, one that minimizes the risks of major loss while protecting their savings against purchasing power erosion from inflation. This conservative approach may seem counter-intuitive to some who believe that taking more risk will allow them to earn more and thus take a higher annual % withdrawal.  When withdrawal rates are north of 5%, this is a temptation but it is in effect gambling with the odds against you.

Most people want to know whether their savings will last for their lifetimes because it is not much good if they spend money to last 30 years but they last 35.  To answer this broader question with any confidence requires two pieces of information:  How much you are routinely spending in total out savings and how long you will live.

As for how long you might live, we can only assume “the worst” and that is that you will outlive your expected median life expectancy of 84. Most with educations and some financial means in the US will.  Realistically that implies you will have expenses to support for perhaps 35 years from today.  Some of your present expenses may decrease in time.  Medical for example should decline when you are eligible for Medicare.  And you most likely will receive Social Security benefits at age 67 or after thus reducing the required draw from your assets. But other expenses may increase.

The best approach in my estimation is to have a rough plan for what the future holds financially for you and for this you may want to enlist the advice of a CFP in your area.

Originally posted on Nerdwallet

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