It is important to consider all your assets that you own and can liquidate rather easily. If you own other assets, such as a house or stocks, you don´t need to be so accurate when you make this planning, since these assets are your back-up solution. Your heirs maybe won’t be so happy if you have to start using some of these assets, but tough luck on them. If they don’t appreciate you living longer than expected, you probably don’t need to feel bad that you will be leaving them less money.

If you don’t have any other assets, you have to be much more cautious with your estimations, so you don’t end up in poverty or have to be dependent on other people.

A. You need to make an estimation about how many years your money have to last.

Statistics in the Western world support estimations that someone who retires today at 65 years of age will on average live a further 20 years or so, to an age of around 85. The problem is that you are likely not an average person, and about 20-25% of people live until 90 years of age or more. Further down, we will address this “problem”.

You can fine tune this number to some extent by looking at your family’s health history such as the age of your parents, if you have any known health issues and how healthy lifestyle you are living. In most countries women lives a couple of years longer in average than men. There are statistics for most countries to be found on the Internet, such as from Eurostat if you live in Europe.

B. Calculate how much money you will need on a monthly basis after you have retired.

Your savings goals should be based on expected expenses in the future. This depends on your planned lifestyle, and generally people tend to spend more money during the first years after retirement, when they are more active. Also, the last years can be more expensive if you don’t live in a country that provides affordable government sponsored nursery care and medicines.

1. Calculate your estimated monthly needs in today’s prices as you can assume that your savings will at least follow inflation.

2. Try to estimate how much you will get from your government in basic state pension/social security payments, after tax. If in doubt, stay on the low side.

3. Add how much you expect to get from your pension plan with your employer, after tax. If in doubt, stay on the low side.

Take your monthly cost in #1 above and add your income from #2 and #3, then you will get the amount you need to provide for yourself from a private saving solution.

Multiply this number by 12 in order to get the yearly amount you need and then multiply by 25.

An example in no specified currency:

1,500 Your expected monthly costs during retirement
+ 600 State pension/social security
+ 400 Employee pension
+ 500 Self financed private pension.

500 x 12 months x 25 = 150,000, which should give you a minimum of 500 extra in monthly income for 30 years, according to the 4% rule that will be described below.

If you find it hard to accumulate the necessary amount you need when you have done your own calculation you should consider these alternatives:

If possible, postpone the date of your retirement. Just a couple of more years will make a big difference, as you are accumulating more money and also not withdrawing anything from your nest egg during these years.

A compromise is to work part-time for a couple of years after your planned retirement date.

Another solution is to downsize your living costs. There are many places in the world with a nice climate and low living costs with affordable and good health care facilities.

If you live in a country where you can accept the public healthcare standard, you can opt out of private solutions. Also, the coverage level of your private health insurance can be re-considered.

There is a widely used rule-of-thumb that if you draw 4% of your money per year adjusted for inflation, it will last for at least 30 years with the same purchasing power. The success of a 4 percent drawdown is based on a portfolio with 50-60 percentage stock allocation and the balance in fixed-income. A lot of research and time tests done show that it has worked for different time periods during more than 100 years, even under severe downturns in the market. However, if you are more conservative, you can adjust your needed private saving figure to a higher amount as we are now living in an extreme low interest climate.

If you accept the use of the 4% rule, you can reduce the risk by adjusting your spending based on market performance. As the first years of withdrawal affects the outcome most, you should be flexible and cut down on your spending if the markets are very weak in the first years of your retirement.

Much more information is available on the Internet about the 4% rule. Taking a flexible approach to the withdrawal amount in the first years seems to be the best way to make it work even in these uncertain times with low interest rates.

C. What to do if you continue to live much longer than expected

It is likely that your money will last even more than 30 years if you use the 4% rule but what do you do if you live more than 30 years after retirement and your private pension saving are getting drained? If you retire at 65, you will be 95, which is not very usual, but some of us will live to that age or more.

1. If you have other assets, you can sell them. In some countries you can use your home as a security to take out a loan even if you don’t have an income.

2. In some countries, you can buy an insurance policy that gives you a payment for as long as you live regardless of to what age. This takes out a lot of the uncertainty as you don’t need to worry that you will outlive your money. This insurance is called “deferred longevity”. It is important to check with different providers and it is a good idea to buy several smaller policies to spread your risk. This is a rather new product that is growing fast.

3. If neither of the two alternatives above works, another solution at age 95 or above will be to lean on your state pension/social security or your relatives, which in almost all cases is a feasible solution.

Please take a look at the Q&A for more information.

If you have a general question that you could not answer through Google, please send an email to questions@easypension.info and I will try to answer it, and add it to the Q&A.

This is not investment advice, it is for general information and education purposes only.The information published on this site should not be relied upon as a substitute for personal financial or professional advice. Please contact a qualified advisor who is neutral, preferably paid by the hour and who understands your legal and tax situation. Also please be sure that you understand the situation fully before you make any investments.