Because it's no longer unusual to live 30 to 40 years in retirement, better financial-planning tools are being developed to help you determine how much of your nest egg you can safely spend in retirement.
We tested some of these software programs and advisory services, which had to meet three important criteria: sound methodology, ease of use and reasonable price. We created a hypothetical couple, John and Mary Smith, and ran their finances through each program.
We assumed they were both retired at age 65. Their assets: $750,000 in IRAs, $100,000 in stocks held in a taxable brokerage account and $20,000 in a money-market fund. Additional income totals $40,000 a year.
The Smiths want to know how much of their investments they can spend and not deplete their nest egg for at least 30 years.
The spending recommendations from the programs we tested were similar: Assuming they want a 90 percent chance of success, the Smiths can withdraw no more than about 4 percent, or close to $35,000, in the first year, and in subsequent years, they can increase the dollar amount of their withdrawal in line with inflation.
To get your feet wet, try one of these free online programs:
Morningstar's Web site www.morningstar.com. Click on "Retirement," then click on "Cash Flow" and download the worksheet from an article titled "How much can I safely withdraw from my portfolio each year?"
Pick the asset allocation that corresponds most closely with your portfolio, and then specify how confident you'd like to be that you'll reach your goal. You must also estimate how long your retirement will last. Using an analytical method called Monte Carlo simulations, Morningstar's worksheet presents a table that shows you how much you can confidently withdraw from your investments. One drawback: Unlike the other programs, the worksheet can't tell you what your portfolio's final balance could be. (If you have trouble downloading the worksheet, e-mail joemorningstar.com for help.)
T. Rowe Price's Web site www.troweprice.com. Click on "Retirement Income Calculator" and follow the directions. Once the program has figured an initial monthly withdrawal recommendation, scroll to the "Portfolio" tab, then click on any of the bars in the chart to see a graph showing you roughly how much money you would have at the end of 30 years, assuming different scenarios.
Once you check out that basic retirement-planning software, you may want to try this more advanced software and a couple of fund companies' customized plans:
Post-retirement Planning Perspective software from Analyze Now can take into account how taxes or a car purchase will affect your ability to spend in the future. The program asks for details such as your age, anticipated tax rate and Social Security income, as well as specific portfolio information.
Once you receive a suggested spending rate, you can then see how long your assets would last in both good and bad investment climates. For subsequent years, the program's Autopilot feature allows you to plug in new information and receive an updated spending budget.
The software is $16.50 sent to you by e-mail. Send a check with your e-mail address to Analyze Now, P.O. Box 5904, Kent, WA 98064.
Professional Wealth Manager, offered online by Financeware.com, works a bit differently. For one thing, you can use either Monte Carlo simulations or historical data. In addition, the program asks you up front how much money you want to have left after the selected period.
Another useful feature is that you and your own financial adviser can simultaneously log on to the site and view your Financeware account while discussing it on the telephone.
Get a week's free access at www.financeware.com; after that, it's $19.95 a month. If you agree to submit your financial data anonymously to the site, you receive three months of free access. Persuade your financial adviser to join and the service remains free indefinitely.
Mutual fund giants Vanguard and T. Rowe Price sell customized plans for $500. Reduced rates are available for retirees willing to invest a significant amount in the company's mutual funds. While both suggest asset allocations using their own funds, requesting a plan puts you under no obligation to buy.
T. Rowe Price's Retirement Income Manager offers you a detailed report and illustrations and includes telephone consultations with one of the firm's advisers. The report's recommendations are based on 500 Monte Carlo simulations of how your retirement savings could fare over the time period you picked. Call 1-800-566-5611 for more information.
Vanguard's Retirement Planning Analysis includes a 25-page report and discussions with one of the company's planners. The spending recommendation is based on running your data through 41 possible scenarios based on historical returns. Worst- and best-case outcomes are presented. For details, call 1-800-567-5162.