How the drawdown is worked out
It follows the balance month by month. Each month the balance grows at the monthly rate, (1 + r ÷ m)m ÷ 12 − 1 for a yearly return r compounded m times a year, and your withdrawal comes out, before or after the growth depending on the timing you choose. If you raise withdrawals each year, the new amount starts with the first withdrawal of each year.
The money runs out in the month a withdrawal can’t be paid in full. In “How much I can take” mode, the calculator finds the largest first withdrawal, to the cent, that is paid in full every time for the whole period. It’s rounded down, so the money really does last.
Worked example
The calculator’s starting values: $500,000, a 5% yearly return compounded monthly, and $3,000 taken at the end of every month.
- The money lasts 23 years and 10 months (286 withdrawals, the last one $427.00)
- You take out $855,427.00 in all: the $500,000 plus $355,427.00 of growth along the way
Asked the other way round, $500,000 at 5% supports $2,684.10 a month for exactly 30 years.
What changes how long it lasts
| $500,000, $3,000 a month | Lasts |
|---|---|
| 5% return (the example) | 23 years 10 months |
| 3% return | 18 years |
| 7% return | 51 years 5 months |
| No return at all | 13 years 11 months |
| 5%, withdrawals raised 3% a year | 16 years 8 months |
The assumed return makes a large difference, which is why it’s worth trying a cautious figure as well as a hopeful one. Raising withdrawals for inflation keeps your spending power but uses the money faster: to last 30 years at 5% with a 3% yearly rise, the first withdrawal would be $1,886.78 a month instead of $2,684.10.
When the money lasts indefinitely
If each month’s growth is at least as large as the withdrawal, the balance never falls. At 5%, $500,000 grows by about $2,083 a month, so withdrawing $2,000 a month leaves it intact, as long as the return holds every year. Raise that $2,000 by 3% a year and it runs out after 27 years and 9 months.
The “4% rule”
In a 1994 study, financial planner William Bengen looked at historical US stock and bond returns and inflation. He found that withdrawing 4% of a portfolio in the first year, then raising the amount with inflation each year, would have lasted at least 30 years in every period he tested. It’s often called the 4% rule.
It describes what happened in the past with a particular mix of US stocks and bonds, no investment fees and no taxes. It isn’t a guarantee, and it may not suit your investments, costs or country. As an illustration, 4% of $500,000 is $1,666.67 a month. Raised 3% a year, that lasts 35 years and 10 months at a steady 5% return, and 25 years and 7 months at 3%.
Assumptions and limitations
- The return is the same every year. Real returns vary, and poor returns in the early years of withdrawals can make money run out much sooner than an average return suggests.
- Taxes, investment fees, pensions and government benefits aren’t included. Enter withdrawals as the amount taken from the savings, before any tax.
- Withdrawals are made on time and in full, with no deposits.
- Each withdrawal is rounded to the cent. The balance isn’t, and figures are rounded only for display.
- This is a planning estimate, not financial advice. For retirement decisions, consider talking to a qualified adviser.
Questions
What return should I assume?
It depends on where the money is. For savings accounts, use the current rate. For investments, a cautious long-run figure is safer than recent returns, and it’s worth comparing a few. Withdrawals from investments that can fall in value carry more risk than a steady rate shows.
Does it account for inflation?
Only if you raise the withdrawals each year under “Raise withdrawals for inflation”. The amounts shown are in future money, not today’s.
How is this different from the Compound Interest Calculator?
The Compound Interest Calculator adds money in and shows what it grows to. This calculator takes money out and shows how long the balance lasts.