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How long will my retirement savings last?

The Retirement Income Review (RIR) noted that many retirees leave large bequests and they would have enjoyed a higher standard of living in retirement if only they had spent some of their capital, not just the income from their investments. Planning cash flow in retirement is extremely difficult because of the uncertainties about expenditure, doubts about investment returns and unpredictability about how long we are going to live.

How long before the tank is empty?

For some retirees, investment returns exceed withdrawals, their savings nest egg continues to accumulate, and they need never fear outliving their savings.

For many others, retirement savings can be compared with a rain water tank. Cash flows in from investment income and the sale of assets and cash flows out to pay a regular income stream as well as lump sums. Just like a rain water tank, if the cash outflow is greater than the cash inflow, sooner or later the tank is empty. The critical question then is; “How long before the retirement savings are exhausted?” The advice is typically; “It depends…” It depends on so many uncertainties that many retirees become extremely cautious.

Rather than simply hoping for the best, the table below provides some guidance for that planning. It shows the number of years it takes for a starting amount of savings to reduce to zero if the percentage withdrawn is greater than the percentage income earned.

To make the spending percentages meaningful, I have included a nominal capital value of retirement savings. Please note the starting capital amount is irrelevant in determining how long it will last. What matters, as always, is the earning rate and the withdrawal rate.

Spending more than you earn

Assume Sue has $800,000 in savings and she needs an annual income of $64,000 (8%). Assume also these retirement savings are invested and earning 6%. Therefore, Sue needs to liquidate $16,000 of capital in the first year to pay the shortfall in income and her savings balance progressively declines. According to this table, reading across the rows and down the columns, it will take 23.79 years until those retirement savings are reduced to zero.

If Sue could reduce her spending to 7%, her savings will last for 33.4 years.

The table shows that if Sue spends 8% of her savings annually and earns only 1% per year, from a term deposit for example, her savings will be exhausted in only 13.42 years. It begs the question why term deposits remain so popular with retirees.

This table assumes constant withdrawal and earning rates over the whole time period, and it assumes no fees, taxes or inflation. The table is not a prediction but it can be instructive.

The real world has fees, taxes and inflation

The table can also illustrate the effects of fees. Using the example above, if the adviser (or other) fee is 1%, the actual spending is 9% annually. According to the table, the savings are then exhausted after only 18.85 years, not 23.79 years. The fee of 1% has truncated the income stream by almost five years. That is the true cost of an annual fee of just 1%. Any tax imposed has the same effect.

With inflation, withdrawals need to progressively increase to maintain spending power. Modelling inflation is not possible because the table assumes uniform withdrawals, but if inflation is a constant 3% (which is near the RBA’s preferred rate) prices will double in 24 years. In that scenario, the example savings will be depleted long before that time.

It is clear that retirees must minimise fees and taxes and retirement income must at least keep pace with inflation.

It is important to note that superannuation pensions mandate minimum withdrawals that increase with age regardless of inflation. For example, at age 80 the minimum withdrawal is 7%. As the table shows, larger withdrawals including lump sums accelerate the rate at which the retirement savings reach zero. Superannuation pensions have been designed to be exhausted by progressively removing assets from this tax concessional area.

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Age pension as a safety net

In reality, the balance of capital is unlikely to reach zero because in Australia we have the safety net of the age pension. A couple who own their home with $800,000 in financial assets would actually be entitled to an annual part-pension of $6,258. Their combined income (investments plus age pension) is $54,258. If this couple were to decrease their capital by $100,000, under the current assets test, their combined pension would increase by $7,800 to $14,058. The taxpayer has replaced the $6,000 (6%) formerly earned from that $100,000 with an increased pension of $7,800 (7.8%). Their combined income is now $56,058.

When their assets fall to $401,500 this couple gain the full age pension of $37,340 so their combined income is $61,430. The age pension places a safety net under all retirees, thereby reducing the need to liquidate capital. 

The challenge of financial independence

For retirees who aspire to financial independence, the task is complex. Without careful planning, retirees are likely to outlive their savings. We know that 50% of males currently aged 65 will survive beyond age 84, but around 5% of that group will survive beyond age 97. Similarly, 50% of females currently aged 65, will survive beyond age 88, but around 5% of that group will survive beyond age 100. Some individuals will survive even longer.

Therefore, if independent retirees wish to plan their retirement with a 95% certainty that they will not outlive their money, they need to plan for a retirement of at least 30 years.

That means, according to the table, they cannot spend much more than their investment earnings – ever! For them that is a different message to that offered by the RIR and their standard of living in retirement is a function of the investment returns they achieve.

There is a direct relationship between risk and investment return, but independent retirees also need to balance market risk against the longevity risk that they will outlive their savings. Therefore, those who adopt low-risk, low-return investments may be sacrificing their long-term financial security due to their short-term concern about market volatility. Yet, such conservative investment portfolios are typically considered normal and appropriate and may explain why so many retirees exhaust their own resources prematurely.


Postscript. You can generate the table yourself by using the (NPER) financial function of Microsoft Excel which calculates the number of periods for the final balance to reach zero by computing the interaction between the earning rate and the spending rate. Or you can just take my word for it.


Jon Kalkman is a former director of the Australian Investors Association. This article is for general information purposes only and does not consider the circumstances of any investor.


April 19, 2021

I find it concerning that there is often implied criticism of self-funded retirees leaving part of their superannuation savings as bequests. With acknowledgment that tax concessions have assisted growing the superannuation funds, unlike recipients of government pension, this is our money. Further, unlike those receiving government funding, the risks are entirely held by the self-funded retiree. As a woman, my superannuation base of several million dollars is apparently unusual but I worked very hard to achieve that. The sadness for me in retirement is that with interest rates at historical lows I am less financially secure than anticipated as I make riskier investments. I cannot erode my base too seriously as another GFC could plunge me into serious negative territory. In this, I am sure, I am not alone and that is why I find that predictive tables have limited value.

April 20, 2021

Interesting comments Diana. In response to your points:

“I worked hard to achieve that” - this is true of 90% of the population - teachers, nurses, doctors, lawyers, toilet cleaners etc.. Hard work does not always equal a lot of money. If it did my mum would be a multimillionaire having worked as a nurse for 50 years doing 12 hours shifts 6 days a week.

Also if someone has $3m dollars in super and earns just 5% = $150,000 interest, this is only taxed at a maximum of 15%. Normally if invested outside super you would be paying about $45,000 tax on this interest. Thus given the tax concession super attracts we might as well take that away and pay the full age pension as it would be cheaper for the government.

October 06, 2021

"If someone had $3m dollars in super....."
THis is a straw man argument. it is extremely difficult for anyone to have more than 1.6m in super any more. While large sums do still exist it is exceedingly rare. To the extent that the "What if..." you propose is irrelevant to most people. (Granted Dianna sounds like an exception).
But to Diana's point. Given most people don't save $3m in super, and don't save the nominal $30k/year in tax that you are positing, why shouldn't people bequest the money that they have saved honourably, and in accordance with all laws that apply?

Jon Kalkman
April 13, 2021

Over a long retirement, there will be so many variations to the earning rate and the spending rate that, because the table assumes these rates are constant over the whole period, it cannot possibly be used as a predictor of the future. For me the lesson from this analysis is not its predictive powers, but the realisation that if I want the income stream to last, I need to preserve the capital that generates it for as long as possible.
That throws the spotlight on to investment returns, which in turn is a function on how much I have to invest. If I have $5million I could probably manage to live on an income of 2% and investing to achieve that is not difficult. If I only have $1 million, however, achieving the same income means a required return of 10%. I then need to choose between the income required, the associated investment risk I am prepared to take and the longevity risk I assume by consuming capital to maintain my standard of living. That is why financial independence in retirement is so difficult to manage for so many retirees with modest savings.
This article was prompted by a comment made by someone who said his retirement investment portfolio comprised 70% cash and 30% equities and he expected his savings to last 30 years! Many retirees opt for such a safe, conservative portfolios in the belief that they can have it both ways. Longevity risk seldom enters the conversation. Because the age pension is always available, longevity risk becomes the responsibility of the taxpayer, not the retiree or their adviser.
This article is an attempt to quantify longevity risk so that retirees can make an informed decision.

April 13, 2021

Your article is a timely reminder of the difficulty of maintaining a lifestyle in a low investment return environment. The longevity risk associated with a conservative investment strategy has forced many retirees with a relatively low capital base to seek out a more growth based investment strategy in order to arrest declining investment returns. This comes at a time when central banks around the world have been flooding the monetary system with liquidity which has the dual effect of lowering interest rates on savings and pushing up prices in equity markets in search of scant returns. I fear that when the inevitable market correction comes along, those retirees conscious of the need for investment returns will again be left the contemplate the erosion of their nest egg this time via sequencing risk

April 13, 2021

"If I have $5million I could probably manage to live on an income of 2% and investing to achieve that is not difficult.":

A retirement of 30 years, withdrawing equivalent of Age Pension payment of $37,340 for home owner couple, starting with capital of $5,000,000 and ending capital of $880,500 so not eligible for Age Pension would allow the retired couple to lose 3.82% on investments per year every year:

=RATE(30, 37340, -5000000, 880500, 0)
=-3.82% (real)

"If I only have $1 million, however, achieving the same income means a required return of 10%":

The same Age Pension dodger couple starting with capital of $5,000,000 would need a return every year of:

=RATE(30, 37340, -1000000, 880500, 0)
=+3.50% (real)

April 12, 2021

A financial article that provides huge value. This was just fantastic. So straight forward and provides such useful information.

I read so many financial articles that basically say nothing. It was so refreshing to find an article that was fantastic !!!

Paul Wales
April 11, 2021

Noel Whittaker has an easy-to-use online Retirement Drawdown Calculator that also includes provision for indexation.

In the main example above, the drawdown calculator agrees with the $800,000, 6% earning rate and $64K annual drawdown lasting 24 years (rounded) with no indexation, and indicates it would last 18 years with 2% indexation.

Note: when entering Starting Balance and Annual Drawings into the calculator, do not use comma separators e.g. enter 800000 not 800,000.

Russell (a veteran adviser)
April 11, 2021

In my experience, over a 20+ year timeframe, retirees do not experience smooth expenditure rates. It is usually 'U' -shaped. I'd add that the part Age Pension safety net makes a big difference to maintaining overall income levels (and retirement capital), even if it doesn't kick in until their mid 70's.

Herman Eldering
April 10, 2021

For a mathematics numpty like me, can anyone leave an excel spreadsheet formatted to make it easy?

April 10, 2021

Too little spreadsheeting knowledge could result in self harming.

Telstra Super Retirement Income Projector is one of the better - but it still takes time to learn how to twiddle the knobs and dials correctly:

Scott Chambers
April 11, 2021

My thoughts exactly, EXCEL would allow adjustments in certain fields for and instant update i.e. Super Balance and Income Required.

April 10, 2021

Thanks very informative article with important information for retirees like myself

April 09, 2021

The problem with the example shown here is that it assumes returns are smooth, when in fact they are anything but. One of the biggest problems for retirees is sequencing risk, where a big crash in the value of their assets in the first 5 years after they finish work can be catastrophic for their retirement plans.

Rob Henshaw
April 08, 2021

Thanks very much - very well explained.
We have now decided on changing our investment strategy based on the information in your article.
We have also set up a spreadsheet based on our financial parameters and used the NPER Excel function as you suggested.
We have used Excel for years, but not the NPER function - took a little while to get used to but now works well for us.
Kind Regards
Rob Henshaw

April 08, 2021

"You can generate the table yourself by using the (NPER) financial function of Microsoft Excel":


= NPER((1+5%)/(1+1%)-1, 37340, -923395.09, 880500, 0)
= 30 y

5% = nominal return / y
1% = inflation / y
37340 = annual withdrawal in real value (here exactly = age pension for home owner couple)
-923395.09 = initial amount in fund
880500 = ending amount in fund in real value (here exactly = age pension cutoff for home owner couple)

Sign: - = in / into fund; + = withdrawn / withdrawable from fund.

This is a 'loaded' example where the return, initial amount in the fund are selected to provide withdrawals exactly equal to the age pension for a home owner couple for exactly 30 years ending with exactly the age pension cutoff assets - so that the couple do not qualify for any age pension during that time.

April 08, 2021

The spending in the table does not include Age Pension. I imagine John Kalkman excluded it to keep the subject simple and to the point.

The excel function NPER assumes no income or capital outside the fund such as the Age Pension, the amount of which being dependent on the pensioner's assets. A multi-row spreadsheet is required if Age Pension is combined.

Age Pension Withdraw Returns Capital
67 0 37,340 3.96% -800,000
68 6,275 37,340 -31,683 -788,068
69 7,205 37,340 -31,211 -774,733
Pension column formula:

Values instantiated in formula for brevity:
37340 = Age Pension for home owner couple
0 = minimum pension
410500 = Asset full pension
880500 = Asset cutoff pension

Capital exists while negative (inside fund); if 0 or more Capital is exhausted.

April 08, 2021

To the team @ Firstlinks & their contribution teams articles.
I found Jon's article on superannuation brilliant, as a 65 year-old male @ retirement age.
It gave me a great example of what can be achieved with financials available.
In a clear unbiased well scripted laid out format.
Thanks Again, informative reading yet again.

Anthony Asher
April 08, 2021

If it helps, you can get a good idea of the impact of the term of an term annuity (or your life expectancy and a life annuity) by the approximate relationship:
Annual amount = Lump sum x [2/3 of the annual interest rate + 1 / (Term or life expectancy in years)]
In words: you can spend the capital over any period you choose, and you lose about one third of the investment return.
Most people are in a couple at retirement - with a joint life expectancy of 30 years. A joint life annuity will give about 3.3% for the capital plus two thirds of the investment return. Spreading over 40 years (for safety given that one of you is likely to hit 100) reduces the contribution from spending capital to about 2.5%. For singles and those with lower life expectancies, the safety margin will be higher. See John de Ravin's take:

April 08, 2021

Well, that will fix Jane Hume's worry about leaving super to my kids ... it will run out first even though I'm trying to preserve it.


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