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Can a Formula Help Your Retirement Cash Flow Last Forever?

“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.”


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What’s Your Magic Number? Knowing how much money you can afford to spend annually, is the first step. Once you know that information, you can start adjusting your expenses and making changes to fit. It’s tempting to work this problem out backwards, i.e., first estimate your expenses, then adjust your investment assumptions. However, that’s not always realistic. It often leads to overspending.  Overspending in the early years of retirement dooms many people’s income in the last decades of their lives. Focus instead on the “real” money: your personal savings and investments, and your guaranteed income.

Your Guaranteed Income. Most people start with their Social Security benefits. These may be reduced in the future, but that future may not arrive for a long time. Therefore, let’s consider them to be a solid number. If you are among the lucky ones, you may have a pension from work. If you own an annuity, or rental property, what income do those assets generate?

Savings-Generated Income. This gets a little tricky, especially with a volatile stock market. How much income can you take from savings and investments, without depleting either too fast? Try this rule of thumb:

  1. Add up the current value of spendable assets. That includes bank accounts, mutual funds, stocks, and bonds. Include retirement accounts, as well as non-retirement accounts.

  2. Subtract from that number a cash cushion, which you should have to cover expenses.

  3. Calculate 4% of that.

This is what financial planners say is the “safe” amount you can afford in the first year of retirement without risking running out of money. Then, take out the same dollar amount, plus an increase for inflation.

Total Your Income. Add that 4% to your other income sources: Social Security, pensions, etc. That’s your safe living expense money. Don’t forget to calculate your tax and health insurance payments.

Create a Realistic Budget. Divide that income by 12 to get your available monthly cash. You’re done. If that amount is not enough, then you may have to rethink additional sources of income, like part-time work, or retiring later than you had originally planned.

Reference: AARP Bulletin (Dec. 2018) “4 Steps to Make Your Money Last a Lifetime”

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