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Estimating How Long Your Money Will Last
By Kimberly Lankford, Contributing Editor, Kiplinger's Personal Finance
March 26, 2001
We have a How Long Will My Money Last? calculator that can do all the math for you, even providing a table showing how much money you'll have available each month. Your $200,000, for example, will last 24 years and 10 months if your investments earn 7% and you withdraw $1,417 per month (about $17,000 per year).
But that calculator only works if you know for sure that you'll get 7% per year, which probably isn't the case.
You might average 7% annually over the long run, but you can't rely on averages to figure out how long your retirement savings will last, or chart other long-term spending plans. Big losses could come early in your investment's lifespan, sapping your principal today and compounded returns tomorrow.
A more accurate planning calculator uses Monte Carlo simulations -- running through hundreds of potential market scenarios -- to determine the probability of your money lasting a specific amount of time. For the sake of example, I put T. Rowe Price's retirement income calculator through the paces.
First, I had to enter my data: age at beginning of retirement, years in retirement, portfolio break-down, etc. For this example, I said I was 65, expecting retirement to last 30 years, and had a portfolio of 60% stocks, 30% bonds and 10% short-term securities. To compare apples with apples, I used the dollar amounts you specified. I wanted to play it safe, so I asked how much I could withdraw every month and still have a 99% likelihood that the money would last 30 years.
When I clicked the calculate button, the Web site ran through its market simulations and estimated that if my portfolio were to last 30 years under 99% of them, I could only withdraw $540 a month.
Changing the number of years in retirement, shifting the portfolio mix and playing the odds will net you different results. For example, using a more conservative portfolio (40% stocks, 40% bonds and 20% short-term securities), I was able to withdraw $1,440 a month with a 99% likelihood that the $200,000 would last at least 10 years -- still less than half the time determined by the fixed-interest calculator.
For more information about cracking your nest egg, see How to Invest in Retirement.
