Turning savings into income
Once you stop working, the question changes from “how much will I have?” to “how much can I spend each month?”. This calculator answers it both ways. In payout mode it finds the monthly amount that spends a balance down to zero over a chosen number of years while the remainder keeps earning a return. In duration mode it tells you how long the money lasts at the withdrawal you have in mind.
The formulas
With B the starting balance, i the monthly return (annual rate ÷ 12) and n the number of months:
- Monthly payout = B × i ÷ (1 − (1 + i)^−n)
- Months the money lasts at a withdrawal W = −ln(1 − i × B ÷ W) ÷ ln(1 + i)
- Interest-only income = B × i, the amount you can take forever without touching the capital
If W is no larger than B × i, the balance never runs out.
Worked example
A retiree has $500,000 invested at a 5% average annual return and wants income for 25 years.
- Monthly return i = 0.05 ÷ 12 = 0.4167%; n = 300 months.
- Monthly payout = 500,000 × 0.004167 ÷ (1 − 1.004167^−300) = $2,922.95.
- Over 25 years that is $876,885 in total, of which $376,885 is investment growth earned along the way.
- Taking $3,000 a month instead, the money lasts about 23.8 years. Living on the interest alone would pay $2,083 a month.
Payout by period
For the same $500,000 at 5%:
| Payout period | Monthly payout |
|---|---|
| 10 years | $5,303 |
| 15 years | $3,954 |
| 20 years | $3,300 |
| 25 years | $2,923 |
| 30 years | $2,684 |
| 40 years | $2,411 |
The 4% rule
The calculator also shows the 4% rule: withdraw 4% of the portfolio in the first year ($1,667 a month on $500,000), then raise it with inflation. Historical US studies found that this rate survived 30-year retirements in most past markets. It is lower than the payout above because it allows for bad years and inflation.
Limits of a constant-return model
- Sequence risk: a market drop early in retirement hurts more than the same drop later, because you are selling assets while prices are low.
- Inflation: a fixed payout loses purchasing power; $2,923 buys about a quarter less after ten years of 3% inflation.
- Taxes: withdrawals from a traditional 401(k) or IRA are taxed as income, and required minimum distributions start at 73 or 75 depending on your birth year.
- Longevity: a 65-year-old has a real chance of living past 90. An insurance annuity or delaying Social Security can cover that risk.
To estimate how much to save before retiring, use the retirement savings calculator.