Do I have enough to retire? How long will my savings last?
To determine how long your savings will last, you can simply take the total amount of all your savings and divide it by your monthly spending. However, this is a very simplified model that does not take into account inflation or any interest earned or other investment gains. Inflation in the US is quite high (at time of writing), but even 2-3% inflation can erode the value of your savings over time, so it's important to take this into account.
Investing your money can help you protect yourself against inflation. Furthermore, it can dramatically increase the longevity of your savings since your current savings will be growing. To illustrate this concept, let's use a simple example:
- You have $100,000 saved up, invested at 10%, and you spend $10,000 per year.
- If you withdrew your $10,000 of spending money at the beginning of the year, you would have $90,000 left.
- At a 10% return, your $90,000 would grow into $99,000, so your portfolio only went down by $1,000!
So even though $100,000 divided by $10,000 would suggest your savings would last 10 years, the $100,000 in the above example would actually last over 25 years!