Retirement Fund Withdrawals
This withdrawal rate calculator can be used to estimate monthly and annual income in retirement. The calculator requires a total of seven inputs to determine these values:
- The age when you expect to retire
- Your life expectancy when you reach your retirement age
- The funds you will have saved when you reach your retirement age
- The funds you would like to leave to your estate
- The annual rate of return you expect to earn on your retirement funds
- If you’ll receive a pension, the calculator requires that value
- Finally, if you’re entitled to some form of government aid, such as Social Security, that value should be entered too
The calculator then provides the user with four values:
- The monthly income generated from your retirement funds
- The monthly income received from both your pension and any government aid
- The total of all monthly income, once retired
- The annual income generated from retirement funds, government aid and / or a pension
Note: The Annual Return on Funds must be a value greater than zero.
One of the biggest worries of retirees is outliving their retirement funds. This calculator accommodates both retirement assets as well as other potential sources of funding to estimate both monthly and annual income. The calculator uses the retirement age and life expectancy values to determine the number of years over which payouts will occur. This tool does not account for inflation or make any cost-of-living adjustments to pensions or government aid, such as Social Security.
For example, an annual income value of 40,000 at retirement age will have less purchasing power as 40,000 when you approach your life expectancy age. If you’d like to model inflation, this can be estimated by lowering the expected Annual Return on Funds by the expected annual rate of inflation. In other word, if you expect an annual rate of return on your retirement assets of 10.0% and inflation of 2.5%, then enter 7.5% as the Annual Return on Funds. In doing so, your retirement funds will actually be higher than modeled and allow you to slightly increase income over time.
While it is possible to determine how much income can generated by your retirement funds, you may also decide you want to leave some money to your heirs. The Funds Left in Estate value is the amount of money remaining in your retirement account at the selected Life Expectancy Age. Increasing the Funds Left in Estate value lowers the amount of income generated by the fund.
Alternative Approaches to Using this Calculator
This calculator can be used to model different retirement scenarios. For example, you might have an Annual Income value you’d like to target in retirement. There are several ways to achieve this target:
- Increasing the retirement age value, thereby delaying retirement, and decreasing the number of years over which income is needed
- Increasing the funds available at retirement, which means setting more money aside in those accounts
- Lowering the amount of funds left in the estate, which means more money can be used to generate income
- Increasing the annual return on funds
While the stock market has provided an average annual return of nearly 11% over the last 50 years, higher returns are directly related to an increase in risk. Over longer-term planning horizons, it’s reasonable to model an average return that approaches this value. Just keep in mind that bear markets do happen periodically, and if all retirement funds were in equities, that would mean selling stocks in a declining market. Having some funds in relatively safe investments, which have lower rates of return, is one way to avoid liquidating stocks at bargain prices to generate income.