There's no way to know exactly how long your 401(k) assets will last in your retirement. It will depend on a number of factors, some of which will be out of your control. But to the extent that you do have control over some of the factors, you can then use available online tools to predict the odds of your assets outlasting you.
How long your assets last will depend primarily on how much you put into your 401(k) account and how early you began saving. A sobering statistic from 401kplanning.org indicates that the median 401(k) account balance among 55- to 64-year-olds was only $100,000 in 2007, before the financial crisis of 2008-2009 hit. If you do not yet contribute the maximum allowed, take advantage of this opportunity.
How long your assets last will also depend on the risks you are willing to take with your investments, both now and in retirement. If you keep all of your money in stable value funds, for example, you might see less volatility, but you might also see less growth. Check to see if your plan sponsor offers financial advice. You want to make sure that the amount of risk you take with your investments is appropriate for your age and comfort level.
Naturally, your assets will last longer if they are not required to cover large living expenses. Make it a goal to pay off all debt, including your home mortgage, before you retire. Your taxes will likely be much lower in retirement, so you needn't worry about losing the mortgage interest deduction. You might also consider moving to a smaller house, further reducing your costs. Don't assume, however, that your living expenses will be much lower than when you were working. While you might not need to spend as much on professional clothing or commute costs, you could have increased medical expenses and travel costs.
How and when you withdraw your assets, also known as your drawdown strategy, will have an impact on how long your assets last. For example, if you can live off the interest and dividends and never sell your principal, you will never outlive your assets. You can also use your assets to purchase what is called an "immediate annuity," a type of insurance product that pays out a guaranteed monthly amount based on actuarial formulas. Your monthly payments will be lower if you arrange for cost-of-living adjustments and survivor benefits, but you have the assurance of knowing that you will never outlive your money.
The 4 Percent Rule
If you don't have enough saved to live off your interest and dividends, you can also use the 4 percent rule. The premise behind this strategy is that if you limit your withdrawals to 4 percent or less of your entire portfolio, the odds of outliving your money are very low. The downside to this strategy is that 4 percent of your portfolio can change from year to year and might not be enough in a down year to cover your expenses.
Monte Carlo simulators allow you to plug in some basic assumptions and calculate the odds of whether you will have enough money available at retirement. The simulators run the assumptions through a variety of scenarios that emulate actual historic conditions (for example, a 10-year period in which there was no growth in stocks) and deliver a percentage. If you plug in your assumptions and you receive a percentage of 50, this would mean that you have 50-50 odds of outliving your assets. On the other hand, you don't need odds of 100 percent to be pretty certain that your retirement assets will keep up. If your brokerage firm does not use Monte Carlo simulations as part of its retirement calculator, you can still use one of the many retirement savings calculators available on the Internet. Try the "Risky Retirement Calculator" at Moneychimp.com that allows you to specify the market years used to calculate your odds.
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