How Long Will My Money Last in Retirement With Social Security?

Understanding how long your retirement savings will last, especially with Social Security benefits, is a key step toward financial security. This involves assessing income streams and projecting future expenses. A clear financial understanding allows for informed decisions about saving, investing, and spending, helping you visualize your resources’ longevity and adjust your strategy.

Understanding Your Retirement Income Picture

Your retirement income begins with Social Security benefits, a foundational component for many retirees. Benefits are calculated based on your average indexed monthly earnings (AIME) over your 35 highest-earning years. The Social Security Administration (SSA) applies a formula to your AIME to determine your primary insurance amount (PIA), the benefit you receive if you claim at your full retirement age (FRA). Your FRA ranges from 66 to 67, depending on your birth year.

Claiming Social Security benefits before your FRA results in a permanent reduction in your monthly payment. Delaying benefits past your FRA, up to age 70, increases your monthly amount through delayed retirement credits. For example, claiming at age 62 can reduce your benefit by up to 30%, while waiting until age 70 can increase it by 8% per year beyond your FRA. Obtain a personalized estimate of your future Social Security benefits by creating an account on the Social Security Administration website and reviewing your Social Security statement.

Beyond Social Security, other income streams contribute to your retirement. Defined benefit plans, known as pensions, provide a guaranteed income stream based on your years of service and salary. While less common today, these plans offer predictable payments that enhance your retirement security.

Withdrawals from tax-advantaged retirement accounts, such as 401(k)s and Individual Retirement Accounts (IRAs), are a major source of income. These accounts grow tax-deferred, and withdrawals in retirement are taxed as ordinary income, unless they are Roth accounts. Understanding required minimum distribution (RMD) rules, which begin at age 73, is important. Annuities, purchased from insurance companies, also provide a steady income stream for a specified period or for life, offering predictability.

Some retirees supplement their income with part-time work, which provides additional funds and can offer social engagement. Rental income from investment properties can also serve as consistent cash flow, though it comes with management responsibilities. Quantifying each income source provides data points to project your total annual retirement income.

Estimating Your Retirement Spending

Accurately estimating your retirement spending begins with analyzing current expenditures to establish a baseline. Tracking where your money goes for several months reveals spending habits and provides a clear picture of essential and discretionary costs. This tracking can be done through budgeting apps, spreadsheets, or by reviewing bank statements and credit card bills. Understanding present spending patterns is crucial for projecting future needs.

Expenses fall into two categories: fixed and variable. Fixed expenses, such as housing costs (mortgage or rent), property taxes, and insurance premiums (home, auto, life, health), remain consistent. Variable expenses, including travel, dining out, entertainment, and hobbies, fluctuate based on lifestyle choices. Separating these categories helps identify areas where spending might change in retirement.

Your expenses will adjust once you stop working. Work-related costs, such as commuting, professional attire, and daily lunches, decrease or disappear. However, other categories may increase, such as travel, leisure activities, and healthcare. Many retirees find they have more time for travel, which can become a significant variable expense.

Healthcare costs are an important consideration in retirement planning, as they increase with age. Medicare, the federal health insurance program for those aged 65 and older, covers a portion of healthcare expenses, but it is not comprehensive. Retirees face premiums for Medicare Part B (medical insurance) and Part D (prescription drug coverage), as well as deductibles, co-payments, and co-insurance.

Beyond Medicare, out-of-pocket costs for services not covered, such as dental, vision, and hearing care, can accumulate. Long-term care, including nursing home care, assisted living, or in-home care, is not covered by Medicare and can be expensive. Inflation also erodes purchasing power, meaning the same money buys less in the future. Accounting for an average inflation rate, historically around 2-3% annually, in your expense projections helps ensure realistic estimates.

Modeling Your Retirement Savings Lifespan

Once you understand your anticipated retirement income and projected expenses, the next step is modeling how long your savings will last. This projection compares your total annual income against your total annual expenses. If expenses exceed income, the deficit must be covered by drawing down savings. If income surpasses expenses, savings can continue to grow.

Several factors influence the longevity of your savings. Investment growth is a primary determinant, as returns generated by invested assets can extend or shorten your portfolio’s lifespan. Use a realistic assumed rate of return, considering historical market performance and your risk tolerance. Overly optimistic growth assumptions can lead to inaccurate projections.

Inflation’s impact on purchasing power must be integrated into your model. While you might project a certain level of expenses today, those same goods and services will cost more in the future due to inflation. Your expense projections should be adjusted upward annually by an estimated inflation rate, typically between 2% and 3%. This reflects the increasing cost of living and the real value of your future income and withdrawals.

Your personal longevity is another variable. The longer you live, the longer your savings will need to support your lifestyle. Use average life expectancies for your age and gender as a guide, or consider living longer than average to build in a buffer. For example, a healthy 65-year-old might plan for their money to last until age 90 or even 95.

Various tools can assist you in modeling your retirement savings lifespan. A basic spreadsheet allows you to input annual income, expenses, and savings balances year by year. You can then apply estimated investment growth rates and inflation adjustments to project how your savings balance changes over time, showing when funds might be depleted. This approach provides a view of your financial trajectory.

Online retirement calculators offer an automated way to perform these projections. They require inputs such as current savings, anticipated retirement date, desired annual retirement income, and assumed rates of return and inflation. They generate an estimate of how long your money will last. For complex financial situations or a personalized analysis, consulting a qualified financial professional can be beneficial. They can use their expertise to create detailed projections, incorporate various scenarios, and help you refine your retirement strategy.