How much can you spend in retirement?
How much can you spend in retirement?
The research was published in by Morningstar experts Christine Benz, Jeffrey Ptak and John Rekenthaler. Benz told me this is such a difficult issue because of four critical unknowns: What will future market returns be for stocks and bonds? What will the rate of inflation be during retirement? Will we spend more or less as we age? How long will we live and, therefore, need our nest egg to last? No one knows the answers to these questions. I’ve found that tend to spend more money than when they worked , as they now have more time to do things that cost money, such as travel. And while no one knows how long each of us will live, it’s clear that a 90-year-old will, on average, have a shorter life expectancy than a 60-year-old. That means the 90-year-old can spend a higher percentage of his nest egg than the 60-year-old. There are a couple of critical points to understand. The first is that when estimating how much one can spend, we must . If we have an average of 2.21 percent annual inflation (assumption used by Morningstar), what costs $100 today will cost an estimated $155 in 20 years. The second point is that while stocks will, on average, produce higher returns than bonds, stocks are also riskier than bonds. Morningstar estimates a safe spend rate by running thousands of possible market return scenarios, using what’s called a Monte Carlo simulation of returns from stocks and bonds. A withdrawal rate with a 50 percent chance of running out of money would be too risky — no different than a coin toss. Instead, Morningstar looked for a 90 percent success rate, meaning the nest egg expired before you did only about 10 percent of the time.
For example, suppose you had a $100,000 nest egg with half the portfolio in stocks. You expect to live another 30 years in retirement. You could withdraw 3.3 percent of this money , or $3,300 , in that first year. Th is amount could increase each year with inflation. Someone (or a couple) with a 10-year life expectancy could spend 9.5 percent of their nest egg in their first year, while a young retiree with a 40-year life expectancy could spend only about 2.8 percent of the portfolio. Note how the safe spend rate is higher when the portfolio has a . That’s because having so much in bonds is risky in that it’s unlikely to beat inflation after taxes , though having so much in stocks is also very risky as the stock market may not quickly recover after the next plunge. Join today and save 25% off the standard annual rate. Get instant access to discounts, programs, services, and the information you need to benefit every area of your life. Morningstar used more conservative return assumptions than in the past. It assumed stocks would have an 8.01 percent average annual return, while bonds would return 2.71 percent a year. Rekenthaler told me they have received some criticism for being conservative, but I completely agree with Morningstar. With current yields so low, it’s highly unlikely that bonds could yield what they have over the last 40 years, and stocks are quite richly valued today. As Benz put it, “We didn’t use historic rates for the same reason we don’t pick investments based on past performance.” Past performance is not indicative of future performance. Though the 2.21 percent annual inflation assumption is far lower than very , Rekenthaler notes that the bond market is, for now, not believing inflation will stay high for the long run as rates are still relatively low. As he says, “the bond market is right more often than wrong.” Both the more conservative assumptions used by Morningstar and the fact that life expectancies have increased result in a lower safe spend rate than the conventional 4 percent used for so many years.
How Much Can I Take From My Retirement Savings
It' s complicated but this method can keep you from running out of money
iStock / Getty Images The most difficult and important issue among those near or in retirement is “How much of my savings can I spend each year without running out of money?” Morningstar, the financial research company, has done some outstanding work recently to answer this question. Hint : It’s not the same for everyone.The research was published in by Morningstar experts Christine Benz, Jeffrey Ptak and John Rekenthaler. Benz told me this is such a difficult issue because of four critical unknowns: What will future market returns be for stocks and bonds? What will the rate of inflation be during retirement? Will we spend more or less as we age? How long will we live and, therefore, need our nest egg to last? No one knows the answers to these questions. I’ve found that tend to spend more money than when they worked , as they now have more time to do things that cost money, such as travel. And while no one knows how long each of us will live, it’s clear that a 90-year-old will, on average, have a shorter life expectancy than a 60-year-old. That means the 90-year-old can spend a higher percentage of his nest egg than the 60-year-old. There are a couple of critical points to understand. The first is that when estimating how much one can spend, we must . If we have an average of 2.21 percent annual inflation (assumption used by Morningstar), what costs $100 today will cost an estimated $155 in 20 years. The second point is that while stocks will, on average, produce higher returns than bonds, stocks are also riskier than bonds. Morningstar estimates a safe spend rate by running thousands of possible market return scenarios, using what’s called a Monte Carlo simulation of returns from stocks and bonds. A withdrawal rate with a 50 percent chance of running out of money would be too risky — no different than a coin toss. Instead, Morningstar looked for a 90 percent success rate, meaning the nest egg expired before you did only about 10 percent of the time.
The results
Here are the Morningstar results. Let me walk you through it. Initial Safe Annual Withdrawal Rate % savings in stocks 10 years 20 years 30 years 40 years 100 8.3% 4.3% 2.9% 2.5% 90 8.6% 4.4% 3.0% 2.6% 80 8.8% 4.6% 3.1% 2.6% 70 9.1% 4.7% 3.2% 2.7% 60 9.3% 4.8% 3.3% 2.8% 50 9.5% 4.9% 3.3% 2.8% 40 9.6% 4.9% 3.3% 2.7% 30 9.7% 4.9% 3.3% 2.7% 20 9.7% 4.8% 3.2% 2.5% 10 9.5% 4.7% 3.0% 2.3% 0 9.5% 4.4% 2.7% 2.0% Source: Morningstar The table shows how much money you can withdraw from your retirement funds in the first year of retirement. The vertical axis on the left shows the percentage of your holdings that are in stocks. The horizonal axis on top is the number of years you expect to be in retirement. After the first year, you can increase your withdrawal every year by the amount of inflation.For example, suppose you had a $100,000 nest egg with half the portfolio in stocks. You expect to live another 30 years in retirement. You could withdraw 3.3 percent of this money , or $3,300 , in that first year. Th is amount could increase each year with inflation. Someone (or a couple) with a 10-year life expectancy could spend 9.5 percent of their nest egg in their first year, while a young retiree with a 40-year life expectancy could spend only about 2.8 percent of the portfolio. Note how the safe spend rate is higher when the portfolio has a . That’s because having so much in bonds is risky in that it’s unlikely to beat inflation after taxes , though having so much in stocks is also very risky as the stock market may not quickly recover after the next plunge. Join today and save 25% off the standard annual rate. Get instant access to discounts, programs, services, and the information you need to benefit every area of your life. Morningstar used more conservative return assumptions than in the past. It assumed stocks would have an 8.01 percent average annual return, while bonds would return 2.71 percent a year. Rekenthaler told me they have received some criticism for being conservative, but I completely agree with Morningstar. With current yields so low, it’s highly unlikely that bonds could yield what they have over the last 40 years, and stocks are quite richly valued today. As Benz put it, “We didn’t use historic rates for the same reason we don’t pick investments based on past performance.” Past performance is not indicative of future performance. Though the 2.21 percent annual inflation assumption is far lower than very , Rekenthaler notes that the bond market is, for now, not believing inflation will stay high for the long run as rates are still relatively low. As he says, “the bond market is right more often than wrong.” Both the more conservative assumptions used by Morningstar and the fact that life expectancies have increased result in a lower safe spend rate than the conventional 4 percent used for so many years.