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4 Steps to Make Your Money Last a Lifetime

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

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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.

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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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Under this system, known as the “4 percent rule,” your savings should last at least 30 years and probably more. That forecast is based on the pioneering work of planner William Bengen, who tested 30-year spending rates against the historical returns of U.S. stocks and Treasury bonds. Some years the markets are up and some years they’re down, but the 4 percent rule takes that into account. As long as you keep withdrawing a steady amount of money, plus increases for inflation, you won’t run out. This rule would have protected your annual income even during 30-year periods that included the Great Depression of the 1930s and Great Stagflation of the 1970s. In better periods, savings lasted for many years more.

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Step 3: Total Your Income

Add that “safe” 4 percent amount to your annual guaranteed income. For example, if you’re due $20,000 from Social Security and take $4,000 from a $100,000 nest egg, you’ll have $24,000 that you can safely use for living expenses, including any taxes.

Step 4: Set Your Budget

Finally, divide your expected yearly income by 12 to get your available monthly cash. And that’s it. Don’t worry about inflation; your income should keep up with inflation, thanks to Social Security’s cost-of-living increases and the annual increases you take from savings.

Special Factors

Jane Bryant Quinn is a personal finance expert and the author of How to Make Your Money Last: The Indispensable Retirement Guide. She has been a contributor to AARP since 2006. 

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