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Calculate Retirement Income With a Simple Online Tool: Test Drive

In my last post, I described a simple online program prepared by an actuary friend of mine, Ken Steiner, that calculates how much to withdraw from your retirement savings each year. The goal is to generate a retirement income that lasts for your lifetime. I discussed how you'll need to make a few critical assumptions to use this tool: your expected length of retirement, the rate of return on your retirement savings, and the rate of inflation that you expect. Here I'll describe the appropriate assumptions in more detail, and I'll take the program for a test drive.

For your expected length of retirement, I'd use an online life expectancy calculator such as or, which will estimate your life expectancy given your current lifestyle and family history. Then I'd add five or ten years to the result, just to be safe. If you're married, estimate your spouse's life expectancy as well. Each year when you recalculate your withdrawal amount, revisit the online calculators to reflect what's happened in your life since the previous year.

A simpler approach would simply be to assume you'll need retirement income until your 95th birthday or your spouse's 95th birthday, whichever is later. However, this assumption won't make sense as you approach your nineties, and you may want to start adjusting this assumption if you make it into your late eighties.

Your assumption regarding the rate of return on your retirement savings should reflect your asset allocation. You can build in some conservatism here to make sure you don't outlive your retirement savings. For a balanced portfolio invested in stocks and bonds, I'd assume an annual rate of 5 or 6 percent (even though Monte Carlo and other analyses would produce higher expected rates, such as 7 percent or higher).

Regarding inflation, an annual rate of 3 or 4 percent seems reasonable to me.

I took Ken's program for a test spin, using a retirement period of 30 years for somebody retiring at age 65. I calculated the initial annual withdrawal rate given a few different scenarios for investment return and inflation. The initial annual withdrawal rate is the dollar amount of your withdrawals divided by your amount of retirement savings. The results are shown below:

The above withdrawal rates are in the ballpark of the well-known "safe" withdrawal rate of 4 percent, as advocated by many retirement experts.

Other actuaries might use annuities to generate a lifetime retirement income, or they might use different methods for calculating the drawdown amount. For example, you may feel more comfortable using a more sophisticated tool such as a Monte Carlo analysis; one of my favorites is on the T. Rowe Price website. I played with this retirement income calculator for a while, and it produced results similar to Ken's program and the 4 percent withdrawal rate.

By inputting different scenarios into Ken's program, you can learn a lot about how your withdrawal amount changes due to the most important factors -- your life expectancy, the rate of return on your investments, and the inflation rate.

In particular, I hope you realize that estimating a safe withdrawal rate is part art, part science. There's no magic formula or number that's guaranteed to produce a retirement income that lasts for the rest of your life. That's why I like being on the safe side, by inputting conservative assumptions, and by having the ability to adjust the results over time to reflect what has actually happened to my retirement savings.

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