How long will your money last in retirement?

Being out of the workforce is wonderful, but nothing will ruin your retirement faster than running out of money.
Being out of the workforce is wonderful, but nothing will ruin your retirement faster than running out of money.

You're sitting poolside, the sun warming your skin, a cold drink in your hand and not a care on your mind. Now that you're retired, the only things you need to worry about are when to apply more sunscreen and what time you tee off. That is, if you've saved up enough money to enjoy a worry-free retirement.

According to an Employee Benefit Research Institute Survey, about one-third of prospective retirees age 55 and over have less than $10,000 in retirement savings, and around two-thirds have less than $100,000 saved up [source: Ransom]. Those figures, even combined with Social Security and pension payouts (both of which are becoming as endangered as the Bengal tiger), won't carry you comfortably through your golden years.

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Even if you scrupulously saved while you were working, your money may not take you as far as you need it to in retirement if you haven't planned well. A shaky market can leave even the most robust portfolio looking meager. One million dollars can quickly whittle away, especially if it has to last for 25 or 30 more years -- which it might, if you live as long as health experts project. Improvements in health care have made it the norm to reach your late 80s or even 90s.

You can't just count on Social Security, nor should you sock your money away in the bank and investments and hope it will grow enough to last your entire retirement. You need to calculate how long your money will last and build in a little bit of cushion for unexpected emergencies, like an unplanned surgery or the dream trip you never had the chance to cross off your bucket list.

Let's look at the variables you need to consider before you let your coworkers throw you a retirement party.

Calculating How Long Retirement Money Will Last

When figuring out how far your money will take you in retirement, you need to consider a number of different factors. For one thing, you need to think about how much you're withdrawing from your retirement nest egg each year. If you're planning to be retired for 25 to 30 years, the figure most experts say you can safely take out of your investments annually is in the 4 percent range [source: MSN Money]. When you think about how much you'll need to withdraw each year, consider not only budgetary staples like your mortgage and the cost of food. Make sure you also take the time to think about nonessentials like travel, not to mention how much you spend on health care -- which is becoming more and more expensive. By one estimate, someone who retires at age 65 today and lives to age 90 will spend about $180,000 for medical costs alone [source: Bloomberg Businessweek].

Asset allocation is another major factor that will determine the size of your nest egg. Where you put your money can determine how long it lasts. Investing in the stock market can be a riskier endeavor than bonds, CDs or leaving your money in cash, but it can also pay off with a much higher rate of return. Experts say you need to leave at least 50 percent of your portfolio in stocks to garner returns high enough to offset the cost of inflation and keep your annual withdrawal at 4 percent [source: MSN Money].

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Retirees also need to consider the rate of inflation. A dollar today doesn't stretch nearly as far as it did when you were younger. Remember when you could buy candy for a penny, or a slice of pizza for a quarter? Today, a candy bar will set you back more than a buck, and a slice of pizza can top $3. Inflation is rising by an average of 3 percent annually -- and that means your retirement funds are buying 3 percent less each year [source: Bureau of Labor Statistics]. In other words, you'll have to give yourself an annual raise to make up for rising inflation.

Luckily, other sources of income can offset any shortcomings in your retirement plan. Social Security won't get you very far alone -- in fact, the average Social Security check in 2011 was just over $1,100 a month [source: US News and World Report]. What's more, pensions are quickly becoming extinct. That said, you can make your retirement dollars stretch farther by lowering your cost of living, getting an annuity, or picking up a part-time job.

If you're not sure whether you're saving enough, several Web sites have set up useful calculators to help you evaluate your retirement dollars. T. Rowe Price's Retirement Income Calculator can help you figure out how much you can safely spend each month, and how long your retirement dollars will last. Smart Money's calculator can also help you determine how long your investments will last, based on your portfolio value and the inflation rate.

For more information on retirement planning, see the links on the next page.

Finance Planning Tips

Here are some tips to help you with generating income and planning for the future.

Presented by United Way of Greater Atlanta Powered by SunTrust Foundation

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Sources

  • Brandon, Emily. "6 Ways to Make Your Retirement Accounts Last Longer." US News and World Report. March 6, 2009. (Accessed May 17, 2011.)                                                           http://money.usnews.com/money/blogs/planning-to-retire/2009/03/06/6-ways-to-make-your-retirement-accounts-last-longer_print.html.
  • Brandon, Emily. "How to Retire on Social Security Alone." US News and World Report, May 16, 2011. (Accessed May 17, 2011.) http://money.usnews.com/money/retirement/articles/2011/05/16/how-to-retire-on-social-security-alone.
  • Bureau of Labor Statistics. Consumer Price Index Survey. May 13, 2011.                                                                               http://www.bls.gov/news.release/cpi.nr0.htm. Accessed May 17, 2011.
  • Ransom, Diana. "How to make your money last during retirement." NYDailyNews.com. January 17, 2011. (Accessed May 17, 2011.)      http://articles.nydailynews.com/2011-01-17/news/29442289_1_social-security-benefits-benefits-calculator-retirement-savings.
  • Schurenberg, Eric. "How to Make Your Retirement Money Last." CBS MoneyWatch. June 25, 2010.                        http://moneywatch.bnet.com/retirement-planning/blog/financial-independence/how-to-make-your-retirement-money-last/937/.
  • Standard & Poor's. "Will Your Retirement Money Last?" Bloomberg BusinessWeek. (Accessed May 17, 2011.)                                             http://www.businessweek.com/print/investor/content/nov2007/pi20071111_402059.htm.
  • Updegrave, Walter. "Retirement: How long will my money last?" CNN Money, March 21, 2011. (Accessed May 17, 2011.)                               http://money.cnn.com/2011/03/21/pf/expert/retirement_savings.moneymag/index.htm.
  • Weston, Liz Pulliam. "Make your money last in retirement; 5 keys." MSN Money. (Accessed May 17, 2011.)                                                       http://articles.moneycentral.msn.com/RetirementandWills/RetireEarly/MakeYourMoneyLastInRetirement5keys.aspx.

Finance Planning Tips

Here are some tips to help you with generating income and planning for the future.

Presented by United Way of Greater Atlanta Powered by SunTrust Foundation