How to know what you can spend in retirement

Learn how pre-retirees can feel confident about receiving their last paycheck.

According to the U.S. Census Bureau, more than half of Americans have a retirement savings account—most frequently, a workplace savings plan like a 401(k). If you’re saving in one of these plans, you likely have an idea what you’re total account balance is, and probably what percent of your salary you’re saving. And even if you don’t, you can take a look at your most recent statement or on your plan’s website.

As important as these things are—your savings rate and account balance can’t tell you the two things that really matter about your retirement savings–namely, how much retirement income you’ll be able to withdraw from your 401(k) account each year, coupled with how long you might need the money.

BlackRock Defined Contribution Survey

In fact, the latest 2018 BlackRock DC Pulse Survey shows that 51% of employees with 401(k) plans reported that it is difficult to know how much retirement income their savings will translate into–and 48% say having to generate their own income worries them. Almost all of them (93%) said they would like guidance from their employer about how much monthly income they could expect from their savings.

And it doesn’t get any easier once you’re retired, either. Research recently published by BlackRock shows that while the vast majority of retirees haven’t been spending their retirement savings (leaving nest eggs mostly untouched and instead living on ready sources of income), future retirees will likely face increased pressure to spend down savings—principal and all—to support their desired retirement lifestyles.

Calculating retirement spending

What’s been missing for most people is a simple way to calculate the level of spending that can be generated from a given savings amount, that takes into account realistic assumptions about a retiree’s longevity as well as a forecast for market returns.

The new LifePath® Spending Tool does just that. By entering two simple inputs–age and amount saved–the tool not only provides spending estimates for the current year (starting at 63) but also estimates spending and account balances in subsequent years (up to age 95).

Since market conditions and longevity forecasts change over time, it’s a tool that can be re-visited each year. For example, the annual spending estimates for a 65-year-old and 70-year-old, each with $500,000, would be $21,427 and $23,802 respectively.* Understanding how to account for longevity may help us spend more efficiently and with more confidence.

Bottom Line

Saving for retirement is hard enough. But for current and future retirees, knowing how to spend the money you’ve saved can mean a material difference to your quality of life and sense of financial security.

Of course, you may wish to discuss your options with a trusted financial advisor when planning for your future. The important thing is to take advantage of all the resources available to you so you can reduce the uncertainty around making your savings last.

*Click here for the methodology and assumptions used in the LifePath® Spending Tool (the “tool”). Projected annual spending amounts were generated 6/30/18 and are subject to change.

Investing involves risks, including possible loss of principal.

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of July 2018 and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

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