How Long Will My Retirement Savings Last?

It’s one of the biggest questions people have as they approach retirement: How long will my retirement savings last?

The answer depends on much more than the balance in your investment accounts. Your retirement age, spending, investment returns, inflation, taxes, pensions, government benefits, unexpected expenses, and how long you live all play a role.

The good news is that you don't need to know the future with certainty. A good retirement plan can model different assumptions and show you how your finances could respond to changing circumstances.

That's the idea behind Retirementize: turn your retirement assumptions into a financial model so you can see how different choices may affect your income and savings over time.

Why Is It So Hard to Know How Long Your Savings Will Last?

At first glance, retirement income seems like simple math: take your savings, subtract your annual spending, and see how many years are left. Unfortunately, retirement doesn't work that way.

• Longevity: You don't know exactly how long you will live, so your retirement plan needs to account for a potentially long retirement.
• Investment returns: Markets don't produce the same return every year. The timing of gains and losses can matter enormously once you begin withdrawing money.
• Inflation: Your spending needs may rise over time, reducing the purchasing power of a fixed amount of money.
• Taxes: The amount you withdraw is not necessarily the amount you get to spend. Tax treatment varies by account type and jurisdiction.
• Unexpected expenses: Home repairs, vehicles, family support, long-term care, and other major expenses can change a retirement plan quickly.
• Changing spending: Retirement spending isn't necessarily constant. Many people spend differently during active early retirement than they do later in life.

The Factors That Determine How Long Your Retirement Savings Will Last

1. How Much You Have Saved

Your starting portfolio is obviously important, but the total number alone doesn't tell the whole story.

Someone retiring with $1 million and spending $80,000 per year faces a very different situation from someone with $1 million who spends $40,000 per year and receives substantial pension income.

Your retirement savings may include a combination of RRSPs, TFSAs, 401(k)s, IRAs, Roth accounts, taxable investments, savings accounts and other assets. Your retirement savings magic number is therefore personal to your circumstances.

2. How Much You Withdraw Each Year

Spending is one of the most important variables in retirement planning. A portfolio can potentially support a higher withdrawal rate for a shorter retirement than it can for a retirement lasting several decades.

The famous 4% rule is often used as a starting point for discussing retirement withdrawals. It should not be treated as a guarantee or a universal answer.

For example, withdrawing $40,000 from a $1 million portfolio represents a 4% initial withdrawal rate. Whether that strategy is sustainable depends on factors such as investment returns, inflation, taxes, spending changes and the length of retirement.

3. Investment Returns

Your investment return has a major effect on how long your savings can last. However, using one assumed average return can hide an important retirement risk: sequence of returns risk.

Two retirees can experience exactly the same average investment return over several decades but have very different outcomes if one experiences major losses early in retirement while the other experiences those losses later.

That's why retirement planning should consider multiple market scenarios rather than relying on a single expected return.

4. Inflation

Inflation can quietly become one of the biggest threats to a long retirement. If prices rise by 3% per year, something costing $50,000 today would cost roughly $105,000 in 25 years if that inflation rate continued.

Your retirement plan should therefore consider whether your income and spending will increase over time rather than assuming today's dollar amount will remain sufficient forever.

5. Taxes

A retirement portfolio should be measured in terms of after-tax spending power, not simply account balances.

A $500,000 tax-deferred account and a $500,000 tax-free account are not necessarily equivalent from a spending perspective. The tax treatment of withdrawals can also change as your income changes.

This is one reason retirement income planning should consider where withdrawals come from, when they occur, and how they interact with pensions and government benefits.

6. How Long You Need the Money

The longer your retirement lasts, the more important longevity planning becomes. A retirement beginning at age 60 may need to be funded for 30 years or more.

Rather than choosing an arbitrary end date, consider what happens if you live substantially longer than expected. A retirement plan that works until age 85 may look very different if you reach 95 or 100.

You can also coordinate retirement savings with government benefits such as CPP, OAS and Social Security. For example, see our articles on Canadian retirement age and Social Security.

Popular Strategies for Making Retirement Savings Last

The 4% Rule

The 4% rule is a useful retirement-planning benchmark, but it isn't a promise that your portfolio will last for a particular number of years.

Withdrawal strategies should reflect your age, portfolio, spending needs, flexibility, taxes and other sources of income.

Read our 4% rule guide for a deeper look at the strategy and its limitations.

Dynamic Withdrawals

A dynamic withdrawal strategy allows spending to change based on the financial environment.

For example, you might spend less on discretionary purchases following a major market decline and spend more during stronger periods. This flexibility can reduce pressure on a portfolio during difficult markets.

The Bucket Strategy

A bucket strategy separates retirement assets into different time horizons. A retiree might maintain cash or short-term investments for near-term spending while investing other assets for longer-term needs.

The goal is to create a source of near-term spending that doesn't require selling long-term investments during every market downturn.

Annuities

Some retirees use annuities to create a stream of guaranteed income in exchange for giving up some liquidity and investment flexibility.

Annuities can be useful in some retirement plans, but the contract terms, guarantees, fees, inflation protection and financial strength of the insurer all matter.

Learn more in our guide: What Is an Annuity?

Delaying Government Benefits

Depending on your circumstances, delaying government retirement benefits can increase the income you receive later.

In Canada, this can include CPP and OAS decisions. In the United States, Social Security claiming age can have a significant effect on lifetime benefit amounts.

For Canadian readers, see our article: 10 Reasons to Delay CPP.

How Much Do You Need to Retire?

There is no single savings target that works for everyone.

Instead of asking whether you have reached a particular number, ask whether your assets and income sources can support your expected spending throughout retirement.

A useful retirement plan considers:

• Your retirement age
• Your current savings and investments
• Your expected retirement spending
• Inflation
• Investment returns
• Taxes
• Pensions and government benefits
• Major one-time expenses
• How long your retirement may last
• How much spending flexibility you have

This is why two people with identical portfolios can have completely different retirement outlooks.

Example: Why Spending Matters

Imagine two couples each retire with $1.2 million invested.

Couple A plans to spend $50,000 per year from their portfolio, while Couple B plans to spend $75,000. Both couples have the same starting balance, but their retirement plans face very different demands.

Now add pensions or government benefits. If one couple receives significantly more guaranteed income, the amount they need to withdraw from their investments may be lower.

Finally, consider market conditions. If a major market decline occurs early in retirement, the couple withdrawing more from investments may have less flexibility to recover.

The lesson is simple: your savings balance is only one part of your retirement plan.

What If Your Retirement Plan Falls Short?

Finding a potential shortfall early gives you more options. Depending on your circumstances, you could consider:

• Saving more: Increase contributions while you're still working.
• Working longer: Even an extra year or two can change the numbers significantly.
• Reducing spending: Lowering your planned withdrawals can extend the life of your portfolio.
• Working part-time: Additional income can reduce withdrawals during the early years of retirement. See our guide to part-time jobs in retirement.
• Downsizing: Moving to a less expensive home can potentially reduce housing and maintenance costs.
• Adjusting your retirement date: Delaying retirement can provide additional saving years while shortening the period your portfolio needs to support.
• Delaying benefits: Depending on your situation, delaying certain government benefits may increase future income.
• Changing your investment strategy: Review your asset allocation and risk level rather than assuming a particular return.

Our article on frugal retirement provides additional ideas for reducing retirement expenses without necessarily giving up the things that matter most to you.

Why Modeling Your Retirement Matters

Retirement planning isn't about predicting the future perfectly. It's about understanding how your plan behaves when the future doesn't go according to plan.

A retirement model can help you explore questions such as:

• What happens if I retire two years earlier?
• What happens if I spend $10,000 more each year?
• What if investment returns are lower than expected?
• What if inflation remains elevated?
• What happens if I live to age 95 or 100?
• Should I change when I start government benefits?
• How much income can my portfolio potentially provide?
• How would a major one-time expense affect my plan?

These are much more useful questions than simply asking, "Do I have enough money to retire?"

Retirementize lets you build a retirement plan around your own income, expenses, savings, pensions and other financial assumptions, then explore how changes could affect your future.

Fun Facts

• A retirement can last several decades, which means longevity is one of the biggest variables in retirement planning.
• Two retirees with the same average investment return can have very different outcomes depending on when their best and worst returns occur.
• Inflation compounds over time. Even relatively modest annual inflation can substantially increase the cost of living over a long retirement.
• A retiree's portfolio balance doesn't tell the whole story. Pensions, government benefits and other income sources can dramatically change how much needs to be withdrawn from savings.
• Retirement spending often changes over time, making a flexible spending plan potentially more realistic than assuming the same annual spending forever.

Conclusion

So, how long will your retirement savings last?

There isn't one universal answer. The result depends on your savings, spending, investment returns, inflation, taxes, income sources and—most importantly—the length of your retirement.

The best way to get a useful answer is to put your own numbers into a retirement model and test different assumptions. Don't rely on a single withdrawal rule or one optimistic investment-return assumption.

Use Retirementize to build your retirement plan and explore different scenarios. Seeing how your plan responds to changes can help you identify potential problems while you still have time to do something about them.

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