Many financial calculators spit out a number to answer the question ‘how much is enough?’ Those that know me know that I wonder whether there is really such thing as enough?
The problem is retirement is not a number. Whatever the number is, it does not really solve our problems. In fact it just leads to more questions. One of those questions is How much income will I get from my investments?
Using withdrawal rates
One of the ways to ballpark the amount of income you can take from your portfolio is to use a withdrawal rate. The debate over what is a safe withdrawal rate will continue and change but let’s use an example of 4%. If a withdrawal rate is 4%, then on $100,000 you could expect $4000 per year from the portfolio.
Obviously, this approach is a little simplistic and depends on the rate of return you can expect on the portfolio. As safe withdrawal rate assumes a retiree should be in a safe, conservative portfolio. and is meant to ‘annuitize’ the total asset. If you invested in a balanced portfolio and achieved an average return of 4%, then your $100,000 capital would be preserved. The greater the returns, the greater the potential risk in the portfolio and therefore, the greater the variability of returns. When this happens market volatility can really destroy portfolios that are paying out an income because the math works against you.
It all depends
So let’s get back to the question “How much will $100,000 pay you in retirement?” the answer is what is so often is “It depends”
The income off a portfolio depends on many different factors:
- when are you going to retire and take income?
- when are you going to die?
- what rate of return will you get?
- how much volatility is there in the portfolio?
- do you want to preserve capital?
If you look at this question from a purely mathematical perspective, it really boils down to 2 things – how long will you live and what rate of return can you expect on your money.
In our retirement workshops we use a little table with these two variables to help answer the question. Here are some different outcomes for different scenarios
- If you are retired and plan to live 21 years and will make 5% on your money, $100,000 will pay you $7800 per year or $650 per month
- If you are 70 years old and plan to use your money over 10 years and will make 3% on your investment, that same $100,000 will pay you $11,720 per year or 977 per month
- If you are 55 and plan to live 30 years but hope to make 7% on your investment, every $100,000s will pay you $8060 per year or $672 per month
- If you plan to live 25 years of retirement but are optimistic about earning 10% on your investment, that same $100,000 will now pay you $11,020 per year
As you can see, the range of outcomes can vary dramatically depending on how many years you will receive income and what return you will earn on your investments. We all want a simple answer and often default to the ‘safe withdrawal rate’ but that method is overly simplistic.
You can download the cheat sheet that I use to help estimate a safe withdrawal rate based on these two variables.
Let's imagine your retirement savings is like a bucket of money. When you are ready to retire, you simply have to “tap the bucket” to start drawing an income. The math above is simply a starting point to guide your decision about how much income you can take from the bucket or how much income you can expect in your retirement. If you think about it, you can open the tap to take more money out or you can close the tap so less money flows out. If you open up the tap, then you run the risk of using up the money it the basket too quickly and running out of money.
Some of the buckets of money that you have, will have different rules around withdrawals. A good example of this is a Registered Retirement Income Fund (RRIF). If a RRSP is a bucket of money, the RRIF is simply a bucket of money that has been tapped with for income. You can open this tap as much as you want but there are rules that will not allow you to close the tap completely. It has to be open a minimum amount, known as the minimum RRIF withdrawal rules
Related article: RRIF minimum withdrawal rules
Another way to figure out how much $100,000 will pay you is to use some free online financial calculators. I’ll share a couple that I use.
The Money-Zine Withdrawal Calculator is a really simple calculator. It’s a US calculator so if you put $0 for pension and social security, you just have to punch in data for 5 other boxes and you can get a sense of how much monthly income a lump sum will pay you.
The Retirement Withdrawal Calculator does much the same thing as the Money-Zine calculator but it allows you to account for inflation on your income as well as preserving a lump sum amount of your asset.
The financial calculators I use the most come from Mackenzie Financial. They are easy to use and free. There are many calculators on this page but I use the Investment and Regular Withdrawal Calculator a lot with clients.