Retirement Assets Depletion Rates

Retirement Assets Depletion Rates

Important: Hypothetical illustrations generated by Morningstar regarding the likelihood of various investment outcomes are hypothetical in nature, do not reflect actual investment results, and are not guarantees of future results.

Results may vary over time and with each simulation. This is for illustrative purposes only and not indicative of any investment. An investment cannot be made directly in an index. © 2017 Morningstar. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar and/or its content providers; (2) may not be copied or distributed; and (3) is not warranted to be accurate complete or timely. Neither Morningstar nor its content providers are responsible for any damages or losses arising from any use of this information. Past performance is no guarantee for future results.

High Withdrawal Rates Will Quickly Deplete Your Assets

Several issues should be examined when determining an investor’s withdrawal rate. Asset allocation, time horizon, and consumption patterns are all important factors in shaping how long portfolio wealth will last.

This chart looks at a hypothetical 50% stock/50% bond portfolio and the effect various inflation-adjusted withdrawal rates have on the end value of the portfolio over a long payout period. Each hypothetical portfolio has an initial starting value of $500,000. It is assumed that a person retires at age 65 and withdraws an inflation-adjusted percentage of the initial portfolio wealth ($500,000) each year beginning at age 66. Annual investment expenses were assumed to be 0.73% for stock mutual funds and 0.60% for bond mutual funds.

As illustrated, the higher the withdrawal rate, the greater the chance of potential shortfall. The lower the rate, the less likely an investor is to outlive their portfolio. Therefore, retirees who anticipate long payout periods may want to consider assuming lower withdrawal rates.

The image was created using Monte Carlo parametric simulation that estimates the range of possible outcomes based on a set of assumptions including arithmetic mean (return), standard deviation (risk), and correlation for a set of asset classes. The inputs used herein are hypothetical, based on historical long-term figures. The hypothetical risk and return of each asset class, cross-correlation, and annual average inflation follow. Stocks: risk 20.2%, return 12.1%; Bonds: risk 5.7%, return 5.4%; Correlation 0.00; Inflation: return 3.0%. Other investments not considered may have characteristics similar or superior to those being analyzed. The simulation is run 5,000 times, to give 5,000 possible 35-year scenarios. A 90% confidence level indicates that there is a 90% chance of the outcome being as shown or better. Higher confidence levels are chosen in order to view tougher market conditions. A limitation of the simulation model is that it assumes a constant inflation-adjusted rate of withdrawal, which may not be representative of actual retirement income needs. This type of simulation also assumes that the distribution of returns is normal. Should actual returns not follow this pattern, results may vary.

Government bonds are guaranteed by the full faith and credit of the United States government as to the timely payment of principal and interest, while returns and principal invested in stocks are not guaranteed. Diversification does not eliminate the risk of experiencing investment losses. Holding a portfolio of securities for the long term does not ensure a profitable outcome and investing in securities always involves risk of loss, including the risk of losing the entire principal.

About the data

Stocks are represented by the Ibbotson® Large Company Stock Index. Bonds are represented by the five-year U.S. government bond, inflation by the Consumer Price Index, and mutual fund expenses from Morningstar. An investment cannot be made directly in an index. The data assumes reinvestment of income and does not account for taxes or transaction costs.

Take the first step toward achieving your financial goals.

Learn More: Building Your Nest Egg: An Emergency Fund

Read more about how to keep your retirement years safe with tips to build your nest egg with an emergency fund.

Ways to Work Towards Happiness in Retirement.

Ways to Work Toward Happiness in Retirement.

The economy is struggling and that is affecting everyone’s financial future. As a result, you must take control of your retirement to ensure that you’ll stay above water when you’re ready to put your feet up and relax.

Here are some things to consider when planning for your retirement:

• Obtain adequate assets before you stop working. Do not rely on company pensions or benefits as your sole income in retirement.

• On average, women live longer than men; many married women outlive their husbands by at least 15 years. Economic decline often occurs after becoming a widow, so women need to prepare to be financially secure for their long lives.

• Outliving your assets is a reality. According to the National Institute of Health (NIH), life expectancy in 1952 was 68.6 years old. In 2006, that figure had risen to 77.85 years old. At this rate, this trend will continue because of lifestyle improvements and advances in medical care. It is wise to organize your portfolio so that a portion of your retirement assets cannot be outlived.

• Contribute as much as possible to your 401(k) savings plan. Set the company match as your baseline for your contributions. Then, as finances allow, increase your automatic contribution amount so that you can set your savings on auto-pilot.

• Save early and diversify your assets to seek to maximize the return on your investments for the amount of risk you are willing to take. Keep in mind that diversification does not ensure a profit or protect against market loss.

• Be prepared for changes in retirement. Remember to take inflation, a possible decline in your functional status, medical costs, and the death of a spouse and other changes in your life into account when saving.

• Decisions made before retirement will affect you in your golden years. This includes taking a new job, getting married, getting divorced or having or adopting a child.

• Maintain your job skills to protect your financial security. Your benefits ultimately depend on your ability to make money. By keeping your skills up-to-date, you can better ensure that you are able to work and make money.

* This is a hypothetical example for illustrative purposes and is not indicative of any investment. Investments involve risks that could result in the loss of principal. There is no guarantee that the strategy illustrated will produce positive investment results. This example assumes payroll deductions of $400 per month for the next 20 years growing at an assumed rate of return of 8.00% (converted to a monthly return), and then compounded monthly.

According to recent government statistics, people age 65 and older have the following incomes:

The median income for people aged 65 or older is $30,193, but there are wide differences within the total group. Approximately 11% have income under $10,000, and roughly 32% have an income of $50,000 or more.


Income differences by age are associated with differences in marital status. Income is highest for married couples, who have a median income more than 2½ times that of non-married persons. Median income is generally lower in older age groups. The striking differences by age are due in part to the disproportionate number of non-married women in older age groups.


In 2014, 85% of married couples and 83.6% of non-married persons aged 65 or older received Social Security benefits. Social Security was the major source of income (providing at least 50% of total income) for 47.8% of married couples and 70.7% of non-married persons aged 65 or older.

Source: Social Security Administration, Office of Retirement and Disability Policy, Income of the Aged Chartbook 2014; and Income of the Population 55 or older 2014, Released April 2016.

Take the first step toward achieving your financial goals.

Learn More: Retirement Assets Depletion Rates

Read about just how fast retirement funds are spent to maintain current lifestyles.

Long Term Care: What it Could Cost.

Long Term Care: What it Could Cost.

It is important to be in the Know – especially when it comes to your long term care options and their expenses. Balance out the possible “what ifs” with knowledge of the facts.

Did you know…

• About 19 percent of Americans aged 65 and older experience some degree of chronic physical impairment. By the year 2020, 12 million older Americans will need long-term care.1

• The U.S. Government Accountability Office estimates that 40 percent of the 13 million people receiving long-term care services are between the ages of 18 and 64.1

• One year in a nursing home can average more than $80,000. In some regions, it can easily cost twice that amount.1

• Disability income insurance will not cover most long-term care expenses.

• People will need to spend almost all of their assets in order to qualify for Medicaid benefits.

About MediCARE

Medicare pays only about 12% for short-term skilled nursing home care following hospitalization. Medicare also pays for some skilled at-home care, but only for short-term unstable medical conditions and not for the ongoing assistance that many elderly, ill, or injured people need.1

About MediCAID

The federal program that provides health care coverage to lower-income Americans – pays almost half of all nursing home costs. Medicaid pays benefits either immediately, for people meeting federal poverty guidelines, or after nursing home residents exhaust their savings and become eligible. Turning to Medicaid once meant impoverishing the spouse who remained at home as well as the spouse confined to a nursing home. However, the law permits the at-home spouse to retain specified levels of assets and income. 1 For 2018, the Medicaid maximum resource allowance for married patients is $123,600 2

Any gifts of assets must occur at least 60 months prior to applying for Medicaid in order to meet the asset guidelines.

1 A Guide to Long-Term Care Insurance © Revised edition, 2003, 2004, 2012, 2013 America’s Health Insurance Plans.

2 2014 Centers for Medicare & Medicaid Services, Medicaid Eligibility Policy.

Long-Term Care Costs by State: Average Nursing Home Cost

STATE

Private/day

Semi-Private/day

Private/month

Semi-Private/month

National Average

Alabama

Alaska

Arizona

Arkansas

California

Colorado

Connecticut

Delaware

Florida

Georgia

Hawaii

Idaho

Illinois

Indiana

Iowa

Kansas

Kentucky

Louisiana

Maine

Maryland

Massachusettes

Michigan

Minnesota

Mississippi

Missouri

Montana

Nebraska

Nevada

New Hampshire

New Jersey

New Mexico

New York

North Carolina

North Dakota

Ohio

Oklahoma

Oregon

Pennsylvania

Rhode Island

South Carolina

South Dakota

Tennessee

Texas

Utah

Vermont

Virginia

Washington

West Virginia

Wisconsin

Wyoming

$253

206

816

255

193

307

267

440

326

275

203

387

244

205

252

200

185

230

169

297

311

395

269

266

217

173

228

211

284

338

367

238

373

245

354

240

165

294

320

315

217

214

207

195

210

293

244

295

286

280

242

$225

195

800

207

161

250

228

407

315

244

190

355

229

184

210

182

171

206

160

275

286

370

250

242

209

156

218

185

261

320

325

213

361

216

359

210

145

277

298

273

199

205

190

148

185

283

221

265

275

257

217

$7,698

6,266

24,820

7,756

5,862

9,338

8,129

13,383

9,901

8,365

6,175

11,776

7,407

6,235

7,665

6,083

5,627

6,981

5,139

9,019

9,444

12,015

8,182

8,086

6,586

5,264

6,935

6,403

8,648

10,281

11,153

7,229

11,330

7,452

10,773

7,300

5,019

8,943

9,733

9,581

6,596

6,509

6,310

5,931

6,388

8,897

7,422

8,973

8,699

8,517

7,375

$6,844

5,931

24,333

6,296

4,905

7,604

6,935

12,364

9,581

7,422

5,779

10,798

6,965

5,597

6,388

5,536

5,201

6,266

4,867

8,365

8,684

11,254

7,604

7,361

6,357

4,730

6,631

5,627

7,939

9,733

9,885

6,471

10,988

6,570

10,905

6,388

4,410

8,425

9,071

8,304

6,053

6,235

5,779

4,502

5,627

8,608

6,715

8,060

8,365

7,817

6,593

Take the first step toward achieving your financial goals.

Learn More: Long Term Care: Medicare

Read more about what Medicare is and how you can supplement it to successfully cover the costs of long term care.