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Ask the expert: How long will my retirement savings last?

November 11, 2010

By Richard Barrington | MoneyRates.com Senior Financial Analyst, CFA

Q: I have $1.5 million in my retirement fund of stocks and bonds. How long will that support me and my wife if our budget is $6,000 per month?

A: This is a good, far-sighted question. Your nest egg should last for many years at your current rate of spending -- the question is, will it last for the rest of your life?

It used to be popular in financial planning circles to use a rule of thumb like 4 percent as the amount of your nest egg you could afford to spend each year. The nice thing about targeting a percentage rather than a fixed dollar amount is that it can adjust upward for inflation if your portfolio grows over time, but it will also automatically reset downward if you suffer an investment setback. Based on a 4 percent rule of thumb, you would budget $60,000 from your $1.5 million retirement savings -- a bit less than you are spending now, but perhaps Social Security payments could fill in the gap.

The problem with a 4 percent rule of thumb is that this is a throwback to a time before short-term interest rates fell to below 1 percent. To look at your situation in a more detailed way, assuming a 5 percent after-tax rate of return and spending increases of 3 percent a year for inflation, if you start by spending $72,000 a year your money will last about 28 years.

Is that enough? It depends on how old you are, and again, on whether Social Security could ease some of the drain on your retirement savings. If you are not sure, consider easing your monthly budget back a bit, or working an extra year or two.

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