What Size Nest Egg Do I Need For A Secure Retirement?
Ask Real Deal Retirement
My husband and I are retired, but aren’t sure whether we have enough in savings to see us through retirement. Is there a specific amount we should have? How can we tell how much is enough?
I think you need to frame this issue a little differently. The amount you should have is pretty much a moot point right now as you’ve already retired. So the more pertinent question is how much can you withdraw from your nest egg each year to cover your retirement living expenses and still have a reasonable level of assurance that you won’t deplete your savings too soon?
Your first step toward answering that query is to determine how much you’re actually spending each year, and the best way to do that is to create a retirement budget. You can make a budget with pencil and paper, but I think you’re better off using an online budgeting tool like BlackRock’s Retirement Expense Worksheet, which allows you to enter some 50 separate expense items in eight categories, including household and medical costs as well as expenditures for discretionary outlays like travel and entertainment. Your budget doesn’t need to be accurate down to the penny, and you can always update it later as necessary. But do the best you can so that your budget reflects your actual spending as closely as possible.
Once you have a decent idea of how much you’re spending each year, you can move on to seeing how likely it is that your nest egg will be able to support you the rest of your life if you continue your current level of spending. An online tool like T. Rowe Price’s retirement income calculator, which you can find in RealDealRetirement.com’s Tools & Calculator’s section, can help you estimate that likelihood.
You simply plug in the current balances of your various retirement accounts, your estimated monthly spending, how your savings are divvied up between stocks, bonds and cash, your Social Security benefit—and the calculator employs Monte Carlo simulations to estimate the probability that income from Social Security plus withdrawals from your nest egg will be able to generate enough income for you to maintain your expected spending for the rest of your life.
(The tool’s default assumption is that you—or your case either you or your husband—will live to age 95. You can choose a different age, but I consider 95 a reasonable assumption given today’s longer lifespans. If you like, you can get a more nuanced take on how long you might need your savings to last based on your age, sex and state of health by revving up the Actuaries Longevity Illustrator tool.)
If after going through this process you find that the chances that the combination of Social Security and draws from your nest egg are uncomfortably low—I’d say you want your chance of success to be at least 70% to 80%—then you can re-run the analysis and change a few assumptions to see how much your odds of success improve.
Not surprisingly, you’ll find that scaling back your spending will boost your odds of success the most. You may also be tempted to invest more aggressively in hopes of earning a higher rate of return on your savings that, in turn, could support a higher level of withdrawals from your nest egg and more spending.
But be careful. Devoting a higher portion of your savings to stocks can leave your nest egg more vulnerable to market downturns and potentially increase the risk of running through your savings too soon. And even absent a serious market setback, investing more aggressively may not boost the chances of your money lasting the rest of your life as much as you might think.
Besides, there are other moves can make that can be more effective than taking on more investing risk. For example, you might check out sites like RetiredBrains.com and Retirementjobs.com for part-time work that can generate more income. If you own a home, you might also consider tapping into the equity by taking out a reverse mortgage or downsizing to smaller, less expensive digs to come away with a chunk of extra cash that can supplement your nest egg. If you’re really worried that you might run through your savings while you’ve still got a lot of living to do, you could also think about converting a portion of your nest egg to a guaranteed lifetime income stream via an immediate annuity or a longevity annuity.
It goes without saying (but I’ll say it anyway) that no tool or calculator can actually predict the future. So what you’re getting when you go through the analysis I outlined above are estimates, not promises, of how long your nest egg is likely to last given different levels of withdrawals based on forecasts of how the financial markets are expected to perform. Still, by going through this process and running a few scenarios, you can get a pretty good sense of how your chances of your money running out go up and down given different levels of withdrawals. If you’re not confident about doing such number-crunching on your own—or you want a more comprehensive assessment of your retirement prospects and how you might improve them—you can always hire a financial adviser to do the analysis for you.
Finally, this isn’t the sort of exercise you can do once and then forget about it. Lots of things can change—market conditions, your spending needs, the value of your nest egg, to name a few. So you should re-assess your situation every year or so with updated information about your expected spending, how many years of retirement you estimate are still ahead of you, your latest account balances, etc. You can then make adjustments, if necessary, to increase the odds that your savings will last as long as you do. (12/31/16)
Walter Updegrave is the editor of RealDealRetirement.com. If you have a question on retirement or investing that you would like Walter to answer online, send it to him at firstname.lastname@example.org. You can tweet Walter at @RealDealRetire.