How to know if the money you have now will last you through retirement

Q: After working toward retirement, I have accumulated a considerable nest egg but still worry that it's not enough. How can I know whether my money will last the rest of my life?

A: Your concern is one that virtually all retirees face, but as a physician you may have reason to be more concerned than many others. If you have worked long enough to accumulate a sizeable retirement nest egg, then you are probably accustomed to having an income that increased steadily and allowed you to improve your lifestyle continually. Realizing that that improvement may not continue after you stop working can be frightening.

Gaining some understanding of your post-retirement financial requirements is critical. What are your quality-of-life desires, and how much do you need to realize them? Once you have a good handle on your cost of living, one of the best tools to help you assess whether your money will last is a Monte Carlo simulation.

Consider this example of a physician couple who were considering retirement after more than 30 years in practice. Markets were uncertain, their income had declined, and they were fearful they would not be able to stop working. After running scenarios using the Monte Carlo simulation, they learned the amount of sustainable withdrawals was far less than they had expected.

An assumed 3% to 4% withdrawal rate and a balanced portfolio produced a 92% probability that their money would last 25 years. Increasing the amount of the withdrawals by 2% decreased the probabilities of the money lasting through their lives to less than 70%.

Increasing the withdrawals by 2% and increasing their life expectancies by 5 years decreased the probabilities of their funds lasting to 50%. As a result, they chose to work longer than they originally had planned.

It is important to note that the scope of issues you face regarding retirement often are complex and interconnected and must be managed in a coordinated manner. The Monte Carlo simulation is a valuable tool but should not replace the advice of an experienced financial planner.

Answers to our readers' questions were provided by Doug Burnette Jr., MD, a partner in Clark & Burnette Wealth Management LLC in Lake Charles, Louisiana. Also engage at http://www.twitter.com/MedEconomics and http://www.facebook.com/MedicalEconomics. Send your money management questions to medec@advanstar.com