Retirement Spending Calculator

Enter what you have saved and this shows what you could spend each year, worked three defensible ways: the 4 percent rule, spending the pot down to zero over a set horizon, and taking a fixed share of the balance each year. They give very different answers from the same money, and the gap between them is the point.

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The question behind the question

"How much can I spend?" sounds like it should have one answer, and it has at least three. Not because anyone is confused, but because the question quietly contains a second one: how much certainty do you want? A plan that could not fail even in the worst run of markets on record will hand you a smaller number than a plan that assumes things go averagely. Both are honest. They are priced differently.

So rather than pick for you, this calculator runs all three and shows what each one costs. That is the whole design. The most useful thing here is not any single figure; it is the size of the gap between them.

The formula

real return = (1 + return) ÷ (1 + inflation) − 1
the rule: first-year spending = savings × rate
spending down: spending = savings × r ÷ (1 − (1 + r)−n)

One convention worth stating, because it changes the answer: the withdrawal comes out at the start of each year and what is left grows behind it. That is how retirement actually works, and it is not the end-of-period convention a loan uses. Using the loan version here would overstate what you can spend by a factor of (1 + real return), which on the worked example below is $1,428 a year, every year, for thirty years.

Everything runs in today's money, which is what the first line is for. Note that a 6% return against 3% inflation is not a 3% real return; it is 2.91%, because you divide rather than subtract. It is a small difference in one year and a large one over thirty. The third line is the ordinary annuity payment formula, the same arithmetic that sets a mortgage payment, pointed the other way: instead of paying a balance down to zero, you are drawing one down to zero.

Worked example

$1,000,000 saved, needs to last 30 years, 6% return, 3% inflation.

Real return: 1.06 ÷ 1.03 − 1 = 2.91%.

The 4% rule gives $1,000,000 × 4% = $40,000 in year one, or $3,333 a month, rising with inflation thereafter. On these assumptions it would actually last about 43 years, and after 30 years it leaves roughly $435,287 unspent.

Spending it down to exactly zero over those 30 years allows $49,017 a year instead. That is $9,017 more every single year, about 23% more income.

Taking 4% of the balance each year starts at the same $40,000, can never run out, but drifts down to about $27,814 a year by year 30.

What that $435,287 actually is

Look again at the first row. On perfectly ordinary assumptions, the 4% rule finishes thirty years with more than four hundred thousand dollars still sitting there. It is worth being clear about what that money is, because it is easy to read it as a bonus.

It is the premium you paid for the guarantee. The 4% figure was set by asking what survived a 1966 retirement, which ran straight into a decade of poor real returns and is the worst starting point in the American record. Sizing your whole retirement to that worst case is a completely reasonable thing to do. But the cost is not abstract: it is $9,017 a year of spending you did not do, for thirty years, so that you would still have been fine if the 1970s had happened to you.

Some people will read that and feel reassured. Others will realise they have been under-spending their own life to insure against something that mostly did not happen. Both reactions are sensible, and the number is the same either way. We would rather show it to you than quietly leave it out.

Why the safe rate is so far below the return

If your portfolio really returns 2.91% after inflation, why is 4% considered aggressive? Because while you are withdrawing, the order of your returns starts to matter, and it did not matter at all while you were saving.

Two retirements with identical average returns can end completely differently depending on when the bad years arrive. If a big fall lands in year two, you are selling shares into it to fund your spending, and those shares are gone before the recovery. If the same fall lands in year twenty-five, most of your withdrawals have already happened and the damage is far smaller. This is called sequence of returns risk, and it is the entire reason a safe withdrawal rate sits well below an average return rather than at it.

It is also why the third method behaves so differently. Taking a fixed percentage of whatever is left can never empty the account, because you are always taking a share of something. The market can cut your income sharply, but it cannot take it to zero. That is a genuinely different kind of safety from the one the 4% rule offers, and which of the two matters more depends on whether your bigger fear is running out of money or running out of income.

Three things this calculator does not know

Your tax bill. Deliberately left out, because the honest answer depends on which accounts you draw from and in what order, and a plausible-looking wrong tax number is worse than an obvious gap. For many retirees tax is among the largest single expenses, so this is the place a real adviser earns their fee.

That spending is not flat. The assumption everywhere here is a steady inflation-adjusted amount for life, which is tidy but not what people actually do. Real spending tends to be highest in the early active years, drift down through the seventies, and then rise again with health and care costs. A flat line is a reasonable average of a shape that is not flat.

Anything about you. Whether 4% or 5% is right for you depends on how much of your spending is essential, whether you have a pension floor underneath it, how you would react to a 30% fall, and how long you might live. Those are not arithmetic questions, and a calculator that pretended otherwise would be overselling itself. Use these numbers to work out which questions to ask, then go and ask them.

Frequently asked questions

How much can I spend each year in retirement?

The most cited answer is the 4 percent rule: take 4 percent of your savings in the first year and raise that dollar amount with inflation each year afterwards. On a $1,000,000 portfolio that is $40,000 in year one. It is a historical worst-case floor rather than a forecast, so on most runs it will leave a lot of money unspent, which this calculator quantifies for you.

Is the 4 percent rule 4 percent of my current balance every year?

No, and this is the single most misunderstood part of it. You work out 4 percent once, on the day you retire, and after that you only raise that dollar figure with inflation. If your portfolio halves, the rule still says take the same inflation-adjusted amount, which is now 8 percent of what is left. That is precisely the risk the rule was designed around, and it is why the rule and a fixed-percentage approach behave so differently.

Where does the 4 percent rule come from?

William Bengen's 1994 paper in the Journal of Financial Planning tested every rolling 30-year period in US market history and found 4 percent survived all of them, including a 1966 retirement, which was the worst starting point on record. The Trinity study reached a similar figure in 1998 by a different route. Bengen himself later revised the number upward as more asset classes were included, and other researchers argue for less, so treat 4 as a well-tested landmark rather than a law.

Why does spending it down allow so much more?

Because it assumes you actually receive your average return every year, while the 4 percent rule assumes you might get the worst sequence in recorded history. On the default assumptions those two answers differ by about 26 percent of your income. Neither is wrong; they are answering different questions, and the difference between them is the price of the guarantee.

What is sequence of returns risk?

It is the fact that the order of your returns matters once you are withdrawing, even though it does not matter at all while you are saving. Two retirements with identical average returns can end very differently if one of them has its bad years early, because selling into a fall means those shares are gone before the recovery arrives. It is the reason a safe withdrawal rate is well below the average return.

Should I use a fixed percentage of my balance instead?

It has one strong advantage: taking a share of what is left can never empty the account, so you cannot run out. The trade is that your income moves with the market, and on the default assumptions here it drifts down by about 30 percent in real terms over 30 years. Many retirees end up somewhere in between, spending a little less after a bad year and a little more after a good one.

Does this include taxes and Social Security?

Social Security and pensions only if you enter them in the other income box, where they are added to the answer. Taxes are deliberately not modelled, because the right figure depends on which accounts you draw from and in what order, and a wrong tax number is worse than an honest gap. Tax can be one of the largest expenses in retirement, so it is worth real advice rather than an assumption.

Why are all the numbers in today's money?

Because a projection that grows your balance with nominal returns but quotes spending in unadjusted dollars flatters itself badly over 30 years. This calculator converts your return and inflation into a single real return, so every figure it prints buys the same amount as a dollar does today. That is why the return field and the inflation field both matter, and why the real return it shows is slightly lower than simply subtracting one from the other.

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