Here’s a formula to help insure that your retirement savings last as long as you do!
Many studies indicate that if you want your retirement savings to last, you should withdraw no more than 4% to 6% of your savings each year. The exact percentage depends on many factors, including how long you live and how much you income you receive from part-time work, social security, etc.
Let’s use an example. Jose wants $80,000 in annual income during retirement. He has a pension and social security benefits totaling $30,000 a year. To earn the remaining $50,000 a year on his investments, he needs a portfolio of at least $1.25 million dollars by the time he retires. That’s because $50,000 is 4% of $1.25 million.
If someone has $100,000 in savings and withdraws 4% a year, that’s just $4,000 a year. With $1,000,000 dollars in savings (at the same 4% withdrawal rate) the amount grows to $40,000 a year … which sounds like a much nicer retirement!
Note: Here’s another way to look at it: Assuming a withdrawal rate of 4%, for every dollar you want to withdraw annually during retirement, you need to have $25 in assets set aside at the time you retire.
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