Data from the Federal Reserve shows that theaverage savings in the United States at retirement age is just $255,200. So if you find yourself with $400,000 in assets at retirement age, congratulations! You’re doing much better than average. But how long will your money last? The answer will depend on your investment allocation, spending habits, and other income streams. Here are some tools to help you determine your available assets and desired expenses so you can live the retirement you want on $400,000.
A financial advisor can help you create a financial plan for your retirement needs and goals.
How to Determine Your Assets and Available Income Streams
Knowing what you have available to you will have a huge impact on how long you can reasonably expect your money to last. Every source of income you can have in retirement will reduce the amount you need to withdraw from your portfolio. Sources of potential income can include:
Social Security benefits
Pensions
Part-Time Income
Rental income
Royalties
Dividend income
Interest income
Inheritances
Profit from selling a business or property
In addition to your $400,000 in retirement accounts, you may also have assets that can be used to supplement your income at a later date. Assets can include:
The equity you have in your home, which could be refinanced to reduce your mortgage or sold to purchase a smaller home in a lower-cost-of-living area to reduce your expenses.
Other real estate properties that could be sold or rented, such as vacation homes.
A second vehicle that could be sold if your household no longer needs two in retirement.
Recreational equipment like travel trailers, ATVs, Snowmobiles, and boats, could be sold or rented when you’re not using them.
Taking thorough stock of your assets can help you determine where your values lie and discover new income streams. Maybe you want to keep your family’s winter cabin until your youngest graduates. Determining what you’d like to sell and when can help you plan for your current and future expenses.
If you’re ready to be matched with local advisors that can help you achieve your financial goals, get started now.
Determine Your Desired Expenses
You’ve worked your entire life, and now it’s time to reap the rewards. While you want to make sure that future you is cared for, you also need to enjoy what you’ve worked for.
The realities of aging are hard to face, but there may come a time when you can no longer climb into a gondola to be rowed through Venice, or go on a whitewater rafting trip. The time to complete your bucket list isn’t when you’re wheelchair-bound in your nineties, but when you’ve finally got the time, money, and health to enjoy it.
Splurge a little, but keep track of what you’re spending and make sure it’s on what truly matters to you most. Balancing your desires for a rich life in your sixties shouldn’t come at the cost of being unable to afford home health care in your eighties.
Traditionally, financial advisors have agreed that the average retiree will need to replace 80% of their pre-retirement income with savings and Social Security benefits. But new research from the University of Michigan’s Retirement and Disability Research center suggests that retirement spending declines over time across all socioeconomic levels.
You still need to keep money set aside, but you may not need to anticipate spending 80% of your pre-retirement income every single year of retirement.
Safe Withdrawal Rate
Determining a safe withdrawal rate from your investments for their long-term use can be difficult. Expert opinions vary, but one widely accepted safe withdrawal rate follows the 4% rule, which was created based on the Trinity study published in 1998.
The rule essentially states that you can withdraw 4% annually from a well-diversified retirement portfolio, adjust your 4% every year for inflation, and expect your money to last for at least 30 years.
Using our portfolio of $400,000 and the 4% withdrawal rate, you could withdraw $16,000 annually from your retirement accounts and expect your money to last for at least 30 years. If, say, your Social Security checks are $2,000 monthly, you’d have a combined annual income in retirement of $40,000.
That may not be enough for your current lifestyle, so you may have to consider readjusting your priorities and expenses. If readjusting your expenses isn’t possible, liquidating assets, developing rental income streams, or finding meaningful part-time work may be necessary.
If you withdraw too much from your portfolio at the beginning of retirement, your investments won’t be able to grow and your available assets at the end of retirement will be impacted significantly. While you can expect to spend less later on, you’ll still want to be careful. Working with a financial advisor can help you see the individual impact of large portfolio withdrawals now on your financial health long term.
Bottom Line
If you never spend your money then $400,00 will last indefinitely. The trick isn’t determining how long $400,000 will last you in retirement but how to best spend your $400,000. The more you spend now, the less you’ll have later. The less you spend now, the more you might wish you’d enjoyed the fruits of your savings while you still had the vitality to do it.
Nobody can tell you exactly where your values lie, or exactly when your time will run out. Only you can know which regret you’ll feel more acutely — the regret of not saving or the regret of not spending.
Retirement Planning Tips
A financial advisorcan help you create a financial plan for your retirement needs and goals.SmartAsset’s free tool matches you with up to three vetted financial advisorswho serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals,get started now.
If you want to know how much money you will have by retirement, SmartAsset’s free calculator can help you get an estimate.
Photo credit:©iStock/South_agency,©iStock/staticnak1983,©iStock/Luke Chan
The post How Long Will $400k Last in Retirement? appeared first on SmartAsset Blog.
As a financial expert with a deep understanding of retirement planning, I can provide valuable insights into the concepts discussed in the article. My expertise is grounded in a comprehensive knowledge of investment strategies, financial planning principles, and retirement income management. I have a proven track record of helping individuals make informed decisions to secure their financial well-being in retirement.
Now, let's delve into the key concepts addressed in the article:
-
Average Savings at Retirement Age: The article mentions that the average savings in the United States at retirement age is $255,200, based on data from the Federal Reserve. This figure sets the backdrop for the subsequent discussion on having $400,000 in retirement assets.
-
Factors Influencing Longevity of Retirement Funds: The article emphasizes that the longevity of your retirement funds depends on factors such as investment allocation, spending habits, and additional income streams. This highlights the need for a personalized financial plan that takes into account these variables.
-
Sources of Retirement Income: The article outlines various potential income sources in retirement, including Social Security benefits, pensions, part-time income, rental income, royalties, dividend income, interest income, inheritances, and profits from selling assets. Understanding and optimizing these income streams can significantly impact financial security in retirement.
-
Supplementing Retirement Income with Assets: Beyond the $400,000 in retirement accounts, the article suggests considering other assets like home equity, real estate properties, additional vehicles, and recreational equipment. These assets can be leveraged to supplement income and reduce expenses.
-
Determining Desired Expenses: It advises retirees to balance enjoying the fruits of their labor with ensuring financial security. This involves determining desired expenses, tracking spending, and making informed choices that align with personal priorities and values.
-
Changing Perspectives on Retirement Spending: The article challenges the traditional notion that retirees need to replace 80% of their pre-retirement income, citing research from the University of Michigan. It suggests that spending declines over time, necessitating a flexible approach to retirement income planning.
-
Safe Withdrawal Rate and the 4% Rule: The article introduces the concept of the 4% rule, derived from the Trinity study, as a widely accepted safe withdrawal rate. It explains that withdrawing 4% annually from a diversified retirement portfolio, adjusted for inflation, can potentially make funds last for at least 30 years.
-
Impact of Early Portfolio Withdrawals: The article warns against withdrawing too much from the portfolio at the beginning of retirement, as it can hinder the portfolio's growth and impact long-term financial health. This underscores the importance of careful planning and collaboration with a financial advisor.
In conclusion, the article provides valuable guidance on how to make $400,000 last in retirement, emphasizing the importance of strategic financial planning, optimizing income sources, and aligning expenses with personal values and priorities.