4 Steps to Make Your Money Last a Lifetime

4 Steps to Make Your Money Last a Lifetime

By Jane Bryant Quinn, AARP Bulletin

A simple, easy-to-use formula to make sure you never run out of cash

As a financial columnist, I get asked the same heartfelt question over and over: “How do I make sure I don’t outlive my money?” And that makes sense. Surveys confirm that the No. 1 worry among older Americans is running out of cash.

Fortunately, financial planners have come up with sound ways to prevent this. Collected here are their key rules for maintaining a livable income for life, plus case studies that show how to put these general rules into action. The goal is your peace of mind — knowing that you’re getting the most from the money you’ve saved and that you’ll always have enough.

The Magic Number

The key to long-term planning is knowing one essential number: how much money you can afford to spend annually. From there, you can adjust your expenses to fit.

You may be tempted to reverse the order — estimate your future expenses, then adjust your investment assumptions to make that spending appear possible. But that’s wishful thinking: a hope that big investment returns will rescue your budget. It leads to overspending early on, and regret later.

Instead, let’s focus on the real, guaranteed money you’ll have. There are two main sources:

Your personal savings and investments.

Your guaranteed income from other sources.

Download this worksheet to help you find your sustainable income. The key steps:

Step 1: Tally Your Guaranteed Income

The most common source is Social Security, which you may already be collecting. (If you’re not, get an estimate by calling Social Security or by opening a My Social Security account at ssa.gov.) You might also have a pension or annuity.

If you own a reliable rental property, include the amount of rent you receive after expenses.

Step 2: Estimate Your Income from Savings

How much annual income can you prudently take from your savings and investments? To get the answer, there’s a surprisingly simple rule of thumb:

Add up the current value of your spendable assets, such as bank accounts, mutual funds, stocks and bonds. Include both retirement and nonretirement savings.

Subtract from that total a cash cushion to help cover near-term expenses.

Then take 4 percent of what remains.

That’s the “safe” amount of your assets that financial planners say you can afford to spend in the first year of retirement without running the risk that your savings will run out. In each subsequent year, take the same dollar amount plus an increase for inflation.

Example: Say you have $100,000 invested (plus a cash cushion). In the first year of retirement you could spend $4,000 of that money. If inflation is running at 3 percent, your second-year withdrawal would be $4,120 — the first-year amount plus an inflation increase. Follow this pattern in each future year.

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https://www.aarp.org/retirement/retirement-savings/info-2018/make-money-last-lifetime.html