Making Your Nest Egg Last
After you have calculated the estimated value of your personal retirement savings, you can estimate what the replacement income from your savings may be— how much your nest egg could give you to live on each year in retirement.

Converting Your Estimated Future Worth to an Annual Replacement Income
Your annual retirement income from your nest egg partially "replaces" the money you were making when working. The following calculation can give you a ballpark estimate of your replacement income.

The Factors
If you have been contributing regularly to your retirement plan, you may have what looks like a lot of money saved up in your account when you retire, but right off the bat taxes will take some of it. Another thing to consider is that your savings may have to last you many years in retirement.

How much money you will have available each year in retirement depends on some of the following factors. Because these factors are impossible to predict exactly, your replacement income estimate will only be a rough approximation.

• Life Span—The first unknown is how many years you're going to be retired. Using several different estimated time spans will give you a range for the yearly income you can expect to have—or how much you can afford to spend—out of your retirement savings. It is best to plan on living a long time in retirement so that you don't use your savings too quickly.

• Inflation Rate—The second variable is the inflation rate when you are retired. The Replacement Income Chart assumes an inflation rate of 4% a year, so you do not have to do any adjusting for inflation. It has been figured into the multipliers.*

When you use the chart, you will get answers in dollar amounts that correspond to today's dollars with today's buying power. (The inflation rate may be different in the years ahead, of course.)

• Amount of Investment Returns—The third variable to look at is the amount of investment returns you expect your savings to earn in retirement. After you retire, consider investing some of your savings so that your investment earnings can help offset the negative effect of inflation.

• Size of Your Nest Egg—The fourth variable is how big your nest egg is going to be—the estimated value of your personal retirement savings.

• Your Spending Rate—The fifth variable is your spending rate. Some people have other resources to help in retirement, such as other savings and investments, a spouse who is still working, or an inheritance. Social Security should also provide people some support in retirement. To figure out how much you can afford to spend every year in retirement, you will need to take all these sources of income into account.

A good rule of thumb: if you want to maintain your standard of living in retirement, your combined annual retirement benefits and other resources should replace 60% to 80% of your present income. If they do not, you may want to consider increasing the size of your retirement plan contributions. You may also want to revisit your overall investment strategy.

Your Replacement Income
The Replacement Income Chart is designed for following a "spend-to-zero" strategy. This means you can use it to help calculate what your annual income may be if you try to make your nest egg last for as long as you are retired—without leaving anything behind.

You can calculate your replacement income by following this spend-to-zero approach:

• Estimate how long you expect to live in retirement.
• Estimate what you expect your investment return to be.
• Locate the multiplier you will use by pinpointing where these two variables intersect on the chart.
• Take the multiplier and multiply it by your estimated nest egg size.

That is how much you might be able to spend every year from your retirement savings account, if you follow a spend-to-zero strategy.

For example, if you expect to live 25 years in retirement and plan to invest your money for an 8% return, you should use the multiplier .06. If your nest egg was $350,000, according to this estimate, your replacement income would total approximately $21,000 a year for 25 years. Again, that is in today's dollars, adjusted for inflation.*

Planning Ahead
If you need your retirement savings to support you in retirement, sock away as much money as possible now when you are working. Continue investing even in retirement. And be disciplined when you retire. Try to spend only that fraction of your savings each year that you can comfortably afford.