How Long Will My Retirement Savings Last?

I'm 64 and plan to retire next April. I have $160,000 saved. How much lifetime income can I expect to draw from my savings? -- Mike W.

Have you ever heard the joke about the accountant who is asked how much two plus two is? His response: "How much do you want it to be?"

Well, there are many possible answers to your question, too.

The amount of income you can expect to receive from your $160,000 stash can vary significantly depending on a number of factors, many of which you can control and many of which you can't. Indeed, how long you'll live and what sort of gains you'll earn on your savings are beyond your control.

Even if you knew the average return you would earn on your savings throughout retirement, you still couldn't know exactly how much lifetime income you could get. When you're drawing money from a portfolio, the pattern of returns, not the average, determines how long your savings will last.

So if you draw the same amount of money each month from two portfolios that earn an identical annualized return of, say 6%, over the next 30 years, but one suffers big losses early in retirement and recovers down the road while the other zooms to big gains at first and stumbles later on, the portfolio with the early losses will run out of money sooner.

The reason is that the combination of lousy initial returns plus withdrawals can deplete your nest egg so badly that there's not enough capital remaining for the portfolio to adequately recover — even when the markets turn around.

Given this sort of inherent uncertainty, how can a retiree arrive at a balance between pulling enough dough out of savings to live on without taking too much risk too soon?

You've got a number of choices. One is to manage the process yourself.

The key to this strategy is to start with a withdrawal rate that gives you a high level of confidence that you'll be able to increase your withdrawal amount annually based on inflation for at least 30 or so years — in your case, into your mid-90s.

Toward that end, many advisers recommend that you follow the "4% rule." For you, that would mean withdrawing 4% of your $160,000, or $6,400, the first year of retirement and then boosting it each year.

If inflation runs at say, 3% a year, your second withdrawal would be roughly $6,600, the third about $6,800 and so on. The advantage to this approach is that research shows you have roughly 80% to 90% odds of your money lasting 30 or more years.

But the 4% rule also has its downsides. One is that you can still run out of money, especially if you get hit with losses early in retirement. Another is that you might find it difficult to live on just 4% of your savings (although, of course, you'll also have Social Security and possibly a pension if you're expecting one from an old employer).

A less obvious risk is that if the financial markets perform decently, limiting yourself to an inflation-adjusted 4% could leave you with a big pile of savings late in life, which means you could have lived larger earlier in retirement.

The way to avoid these issues is to adjust the amount you withdraw along the way, taking less if your portfolio has taken a hit and more if it's ballooning in value.

Of course, you could also consider other withdrawal rates. For example, Maryland financial planner Michael Kitces has done research showing that you may be able to safely go to a higher initial withdrawal rate, say, 5% or more, if you're starting out when the stock market is undervalued and thus more likely to earn above-average returns going ahead.

Similarly, Minneapolis financial planner Jonathan Guyton and retirement-planning software developer William Klinger have done computerized simulations showing that a retirement portfolio has a high probability of lasting 40 years even with an inflation-adjusted initial withdrawal rate of just over 5%, provided you strictly follow a series of "decision rules" that call for you to adjust your withdrawals throughout retirement based on your investment performance.

If you want to take some of the guesswork out of the process, a good way to generate guaranteed income in retirement is to buy an immediate annuity.

To set up an immediate annuity, you hand over a portion of your savings to an insurer (or, far more common, to an investment firm selling annuities for the insurer) that then issues you a monthly check for life, the size of which depends on your age and the prevailing level of interest rates. Today, for example, a 65-year-old man might receive roughly $580 a month.

If you want income that will rise with inflation, you can get an immediate annuity that is linked with the consumer price index, or CPI. But you'll start with a payment closer to $400. (To see how much you might receive at different ages and for different sums, click here.)

A couple words of caution about annuities, however. When you buy an annuity you are betting that the insurer will be able to make payments for many years into the future. There is no 100% guarantee that insurer will be able to meet those obligations, but there are ways to protect yourself.

Also, I strongly recommend that you don't put your entire retirement stash into an annuity, as you are typically giving up access to the money you invest. That means the cash won't be available for emergencies or other expenses, which is why I think it's a good idea to consider a hybrid strategy that combines the assured income of an annuity with draws from a portfolio of stocks and bond funds that can provide liquidity and some long-term growth.

Whichever way you decide to go, it's important that you monitor your progress and be prepared to make adjustments to stay on track.

Online tools can help. With Vanguard's Retirement Nest Egg Calculator, for example, you can estimate how long your savings might last with different withdrawal rates and investing strategies.

And both T. Rowe Price's Retirement Income Calculator and Fidelity's Retirement Income Planner tool allow you to probe even deeper, testing a variety of strategies.

(One caveat: Depending on how you answer risk-tolerance questions in Fidelity's tool, it may end up recommending a plan with one or more annuities. But you can always click on a link for a non-annuity plan, and compare the two.)

If you feel as if all of this is a bit much for you, consult an adviser. Just try to find one with an open mind — not someone whose main mission is to sell annuities nor someone so ideologically opposed to annuities that he wouldn't even consider including one in a retirement income plan.

The bottom line, though, is that if you start making withdrawals at a sensible level and remain willing to make occasional adjustments, you'll be doing everything you need to do to make that $160,000 go as far as it can.