Retirement Spending Calculator Based on a Portfolio, Fund, or Stock
Retirement Spending Calculator Based on a Portfolio, Fund, or Stock helps you estimate how long your retirement savings will could have lasted based on historical investment returns. By entering your starting amount, the time period, withdrawal rate, and choosing an investment option (such as a portfolio, fund, or stock), the calculator generates a detailed chart showing end balance and total withdrawals in the time period given. Customize the withdrawal frequency to fit your needs, and gain insights into how your spending would have performed based on past investment returns.
Instructions for Retirement Spending Calculator Based on a Portfolio, Fund, or Stock
Follow these simple steps to estimate your retirement spending based on historical returns.
Input Instructions:
- Starting Amount:
Enter the initial amount of savings or investments you are beginning with in retirement. - Period (Years):
Specify the number of years you want to run the calculation for. This could represent your planned retirement horizon. - Investment Portfolio or Fund:
Choose the investment portfolio or fund you’re tracking. The calculator uses historical returns from the selected portfolio or fund to estimate your spending and remaining balance. - Withdrawal Rate (%):
Enter the percentage of your portfolio you plan to withdraw annually. Common withdrawal rates are around 4%, but you can set this to fit your plan. - Withdrawal Frequency:
By default, withdrawals are calculated annually. However, you can choose to switch to quarterly or monthly withdrawals if you prefer more frequent disbursements.
Output:
The calculator will generate a chart showing:
- Initial Amount: The starting balance of your portfolio.
- End Balance: The projected balance remaining at the end of the specified period, factoring in withdrawals and investment performance.
- Total Withdrawal: The total amount withdrawn over the period.
It will also display your spending from the chosen period up to today, based on the historical returns of the investment portfolio or fund, giving you a clearer picture of how the spending strategy would have performed in the past.
Understanding Retirement Spending Strategies: The 4% Rule and Beyond
When planning for retirement, one of the biggest questions retirees face is how much they can safely withdraw from their savings each year without running out of money. The 4% rule has long been a popular guideline, but as financial markets and individual circumstances evolve, it’s worth exploring whether this strategy is still the best approach and what other options exist.
What Is the 4% Rule?
The 4% rule was developed in the 1990s by financial planner William Bengen, based on historical data about stock and bond returns. The rule suggests that retirees can withdraw 4% of their initial retirement portfolio in the first year of retirement, then adjust that amount for inflation each year going forward. The idea is that this rate of withdrawal would allow the savings to last for at least 30 years, even through market downturns.
For example, if you retire with $500,000 saved, the 4% rule would have you withdraw $20,000 in your first year. In subsequent years, you’d increase this amount to account for inflation—so if inflation is 2%, you’d withdraw $20,400 in year two.
Why Has the 4% Rule Been Popular?
The 4% rule became a popular benchmark because of its simplicity and reassurance. It gives retirees a straightforward framework for estimating how much they can spend without worrying about running out of money. It’s also based on historical market data, providing a cushion through a mix of stock market growth and more stable bond returns.
Additionally, the 4% rule assumes a balanced investment portfolio, typically 50% stocks and 50% bonds. Over the long term, such a portfolio has historically provided enough growth to support the withdrawals while also maintaining a relatively lower level of risk compared to more aggressive, stock-heavy investments.
Challenges to the 4% Rule
While the 4% rule offers a solid starting point, it has its limitations, particularly in today’s changing economic landscape. Here are a few key challenges:
- Low Bond Yields: When Bengen developed the 4% rule, bond yields were significantly higher than they are today. With interest rates at historic lows, bonds may not provide the same level of income or stability as they did in the past.
- Market Volatility: Stock market returns have become more unpredictable. The sequence of returns risk—where poor investment returns in the early years of retirement can drastically reduce the portfolio’s longevity—is a major concern for retirees who rely heavily on the stock market.
- Inflation and Longevity: Inflation can erode purchasing power over time, especially if it rises sharply. Additionally, with people living longer on average, a 30-year retirement may not be long enough for some. For those who live longer, a higher withdrawal rate might deplete savings prematurely.
Adapting the 4% Rule for Modern Retirement
Given the challenges of today’s economic environment, some financial experts argue that retirees should take a more flexible approach than strictly following the 4% rule. Here are a few alternatives and adjustments that can make a big difference:
- Lower Withdrawal Rates: Some suggest starting with a lower withdrawal rate, such as 3.5%, especially in low-return environments. This allows for more conservative spending early in retirement, giving your portfolio more room to grow before larger withdrawals are needed.
- Dynamic Withdrawals: Rather than sticking to a fixed percentage, dynamic withdrawal strategies adjust spending based on market performance. For instance, you might lower your withdrawals during a market downturn and increase them during strong market years. This helps protect your portfolio from being drained too quickly during economic slumps.
- Bucket Strategies: Some retirees use a “bucket” strategy, where their savings are divided into multiple pools—each designated for different time frames. For example, the first bucket could cover short-term expenses using safer investments like cash or bonds, while later buckets hold more growth-oriented investments like stocks, designed for longer-term needs. This approach offers flexibility in managing spending.
- Focus on Spending Priorities: Another alternative is to prioritize essential and discretionary spending. Withdrawals can cover essential expenses (like housing, healthcare, and food), while more flexible spending can adjust based on the portfolio’s performance in a given year. When markets are performing poorly, it’s often a time to keep put or even rebalance your investment portfolios by investing more into losing assets such as stocks. Similarly, when markets are performing well, it’s prudent to withdraw more from appreciated assets such as stocks and be prepared for future rainy days.
The Importance of Reviewing Your Plan
No retirement spending plan is one-size-fits-all. Your own spending strategy should take into account your risk tolerance, investment preferences, longevity expectations, and income sources (such as pensions or Social Security). Regularly reviewing your plan and making adjustments as needed is crucial to ensure it stays on track with your goals.
For many retirees, tools like retirement spending calculators (especially those that factor in historical returns from specific portfolios or funds) can help provide deeper insights. These tools allow you to simulate different withdrawal rates, portfolios, and market conditions, so you can see how various strategies would have performed in the past and make more informed decisions about the future.
Conclusion
The 4% rule remains a useful guideline for retirement spending, but it’s not a perfect solution for everyone. In today’s unpredictable economic environment, retirees should consider more flexible strategies that account for market volatility, longevity, and personal circumstances. Whether you stick with a fixed withdrawal rate or explore dynamic approaches, it’s essential to continuously monitor your portfolio and adjust as needed to ensure your savings last throughout retirement.
See the following newsletter articles:
September 28, 2020: Retirement Spending: Your Portfolio’s Volatility Matters
April 15, 2019: The Importance Of Fixed Income Returns For Retirement Spending