UPDATE: I’ve added two additional mortality tables for each sex, one representing a very healthy individual and thus longer expected lifespan, and one representing an unhealthy (smoker) individual with a shorter expected lifespan. This provides 3 different life expectancy curves (essentially low, average and high life expectancy). I also upgraded the spending flexibility parameter to allow you to determine at what percentage of your initial balance does the spending reduction kick in.
Rich, Broke or Dead?
One of the key issues with retiring is the question of outliving your money. This is also known as Longevity Risk and is especially important if you want to retire early, since your retirement could be 50 years long (or more). This interactive post-retirement calculation and visualization looks at the question of whether your retirement savings can last long enough to support your retirement spending and combines it with average US life expectancy values to get a fuller picture of the likelihood of running out of money before you die.
It helps to answer the question: If I start out with $X dollars at the beginning of my retirement, will I run out of money before I die?
– Use this button to generate a URL that you can share a specific set of inputs and graphs. Just copy the URL in the address bar at the top of your browser (after pressing the button).
Probabilities based on historical cycles
The graph shows the likelihood of your balance being at different levels during each year of your retirement (and compares it to the probability of dying during this time). Red indicates failure (i.e. you’ve run out of money) and green indicates success (i.e. you haven’t run out of money). The probabilities are calculated based upon looking at stock, bond and cash returns from historical cycles between 1871 and 2019. If you expect to retire for 50 years, one historical cycle would be from 1871 to 1922, another one from 1872 to 1923, and so on until 1968 to 2019. Thus 98 different historical cycles are considered (in this case). It is important to note that these frequencies in the past are not the same as actual probabilities. Just because an outcome happened once in history doesn’t mean that there is a one in 98 chance (1.02%) of this same thing happening in the future. However, if your retirement portfolio survives most historical cycles, there is a good chance that it’ll survive in the future without any major black swan events. If something crazy occurs (e.g. a major nuclear war), your retirement balance may be the least of your worries, so we can safely ignore this, since there’s very little way to prepare for it financially. If you look over all these historical cycles, we find that a 4% withdrawal rate will generally last through a long retirement, though there are occasional cycles that are “failures”, i.e. you run out of money. See here for more info on the 4% rule and how historical simulations of withdrawal rate are performed.
The fields are all pre-filled but you should modify the numbers to suit your situation or to explore other options. Press ‘Enter’ or ‘tab’ after you enter the value into the input box.
- Hover over the input labels for more info.
- Enter your expected spending per year in retirement and the savings amount you expect to have at retirement.
- Enter your age at retirement and how long you expect to live (you can estimate on the longer side since the calculator will include life expectancy).
- You can now choose between three different mortality tables (an average American lifespan based on the Social Security Administration mortality table, or a low and high life expectancy table from the Society of Actuaries)
- Enter your target asset allocation for retirement.
- Enter your sex.
- If you think you’ll have some flexibility in your spending post-retirement, you can enter the percentage reduction in spending that will happen if your portfolio is below a certain threshold, as a percentage of your inflation-adjusted starting balance (see next point).
- You should enter the percentage of your initial balance at which the spending flexibility will kick in. If you set it to 90% you will reduce spending when your portfolio balance is below 90% of your inflation adjusted starting balance.
- Enter your average expected tax rate (not your marginal rate) – this will be applied to your annual spending and any additional income.
- Enter your average investment fees (e.g. expense ratios).
- Enter any additional income sources or expenses that aren’t applicable for the entire model period, and indicate both the starting and ending ages. If you have multiple income or expense streams, you can enter them all separated by a semi-colon (;).
You can also modify a few graph elements (to help you focus on different parts of the graph):
- Show or hide the death probability wedge. Hiding it helps you investigate the portfolio balances with greater resolution for later years.
- Show or hide different categories of success (green wedges). Success is defined as any outcome where you are not broke (i.e. balance <0). Additional categories of success include balances that are below your initial retirement balance (but still above zero) and balances that are more than double and five times your initial retirement balance.
- You can download an PNG image of your graph (click on the camera icon in the lower right).
Huge tip of the hat to maizeman who first developed this type of graph and was helpful in putting these graphs together. Thanks! Here is maizeman’s github repo. It is also inspired by many hours of playing with cFIREsim and FIRECalc.
Visualizing Longevity Risk
One of the most valuable things about these sorts of interactive graphs is that it allows you to understand how the results vary as you modify the inputs (asset allocation and length of retirement). So I encourage you to play with the inputs to calculator and the ways to visualize and see how the results and hopefully your understanding of the processes change.
One of the key takeaways from this is how large the ‘Wedge of Death’ gets as you get older and how the likelihood of dying is much higher than running out of money.
Another important takeaway is that if your retirement has a large likelihood of success (e.g. 4% or lower withdrawal rate), your retirement balance is most likely to be large (more than 2x your initial balance).
As mentioned earlier, it is important to remember that past performance does not predict future performance.
Update: – I’ve gotten alot of really good feedback on this tool. I’m really happy that people find it useful and informative. I’ve also gotten a long list of suggested additions to the calculator, so come back and check to see if I’ve implemented any.
First update: I added the ability to toggle between looking at nominal and inflation-adjusted success values. i.e. if we are looking at 2x the original starting balance, 2x can be in nominal dollars (i.e. $2 million on a $1M starting balance) or 2x in inflation adjusted dollars (i.e. more than $2M, whose exact value depends on the historical inflation for a particular cycle). You’ll notice that the success bands look worse when comparing to the inflation-adjusted (real) starting balance rather than the nominal starting balance.
2nd update: I added a few requested features. The first two are the ability to specify you annual tax rate on income and also fees (like expense ratios) on your investments. The main addition is the ability to add multiple income and expense streams with specified starting and end dates to the calculation. This is useful for adding income streams like social security or pensions and temporary expenses like a mortgage or childrens’ college expenses.
3rd update: I added a 5x category just because in many cases (especially less than 4% withdrawal rate), you see huge growth in your portfolio in many/most cases. I also added a button to generate a URL that you can share specific parameters and scenarios with other folks.
4th update: I added a simple spending flexibility parameter that allows you to specify how much you could reduce spending when your portfolio is below a certain threshold (in this case, your original retirement amount (inflation adjusted)).
5th update: I’ve updated the market data to include annual data up to and including 2019.
I also fixed a small bug which affected real stock market returns so you may see a very slight reduction in real average returns and success rates.
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