How Can I Calculate How Long My Money Will Last?

If you are working a nine to five job, you are probably dreaming of the day you can retire and live off of your savings. Most of us spend our lives accumulating the funds we hope will see us through a comfortable retirement, but it can be difficult to know just how long that money will last. There are so many variables involved, and the thought of running out of money just when you need it the most is obviously quite frightening.

If you plan to live off of the money you have saved and invested it is critical to calculate your monthly expenses. Hopefully, you have a monthly budget in place already--if you do not, it is time to start creating one. Once you have your budget in place, you can calculate how much you will need to draw from your investment portfolio. When calculating how much you will need on a monthly and an annual basis, factor in any large unexpected expenses that may come your way. When estimating your annual living expenses, it is much better to overestimate and have money left to put back into savings than to underestimate and have to cash out more of your portfolio.

After you have determined how much you need to live on each year, calculate the percentage of your portfolio it will take to produce that income. If you need $30,000 a year to pay your bills and you have a portfolio of $600,000 to draw on, that $30,000 would represent a 5 percent withdrawal rate. Many investment advisers recommend limiting withdrawals to 4 to 5 percent of the portfolio's value in order to maximize the chances that the money will last at least 30 years.

Another factor that plays a big role in determining how long your money will last is what type of investor you are. If you are a conservative investor, your returns will be limited, and you may find that the value of your portfolio is decreased over time by inflation. If you are an aggressive investor, you may find that a bear market steals a portion of your portfolio's value. For this reason, many investment professionals recommend that those in or nearing retirement take a balanced approach to investing by placing half of the money in the stock market and half in bonds and other fixed income investments.

To ensure your money will last as long as you do, carefully track how your portfolio is performing, even as you are drawing on that portfolio for a steady income. Calculating your investment returns on an annual or semiannual basis will help you see how you are doing. If your investments are generating a return of 6 percent and you are withdrawing only 4 percent, you can be much more certain that your money will last than if you are earning only 2 to 3 percent.