Planning for your financial future involves understanding a crucial question: “How long will my money last?”. Our user-friendly calculator at money-central.com is designed to help you estimate just that. While some inputs are straightforward, accurately projecting the lifespan of your savings requires careful consideration of various assumptions about your financial habits and investment growth.
Essential Inputs for Estimating Savings Longevity
To effectively use a “How Long Money Last” calculator, you’ll need to consider both what you know and what you need to assume.
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Current Savings Balance: This is the most readily available figure. Your current savings balance provides the starting point for calculations.
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Anticipated Monthly Withdrawal Amount: Determining your monthly needs is the next step. If you’re unsure, reviewing your current budget can provide a realistic withdrawal figure to cover your living expenses. A common strategy is the “4% rule,” which suggests withdrawing 4% of your total retirement savings annually.
Key Assumptions That Impact Your Savings
Beyond the known figures, certain assumptions play a significant role in determining how long your money will last.
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Annual Withdrawal Increases: Inflation erodes purchasing power over time. Typically linked to inflation rates, increasing your withdrawals annually helps maintain your living standard. Historically, the average U.S. inflation rate over the past decades has been around 3.43%. Therefore, planning for annual withdrawal increases between 3% and 5% can be a prudent approach to counteract inflation and rising living costs.
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Annual Return on Savings (Pre-Tax): The growth rate of your savings is crucial. This depends heavily on your investment strategy. Aggressive investment portfolios may offer higher returns but come with greater risk. Conversely, conservative investments, often favored by older adults, are less risky but may yield lower returns. Investing in broad market indexes has historically provided average annual returns in the range of 5% to 8%. Your anticipated return significantly impacts how long your money will last.
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Federal Marginal Tax Bracket: Taxes are a vital consideration. In retirement, your marginal tax rate is calculated similarly to your working years. Withdrawals from tax-deferred accounts, along with other income sources like Social Security, are considered taxable income. Estimating your total annual income in retirement will help you determine your tax bracket and marginal tax rate, impacting the net amount of money available to you.
By carefully considering these inputs and assumptions, you can gain a clearer picture of “how long money last” and make informed decisions about your financial future.
