Different financial advisors offer different rules of thumb for determining whether you have enough money to retire. The challenge of this determination is that retirement planning must account for unknown variables that could affect your retirement income far into the future.

Poor-performing investments, changes in tax laws, unexpected expenses, and shifting retirement goals can all affect how much money you need in retirement and how much you will have at your disposal. 

Retirement planning should not be conducted as a one-and-done process or approached through cookie-cutter questionnaires that gather your data and plot your retirement income and expenses.

Any worthwhile asset depletion analysis should be tailored to your specific needs and goals from the very start of the info-gathering process. You should approach this planning as an ongoing collaboration with your financial advisor to make sure you’re on track to reach the retirement goals you’ve set for yourself.

Determine How Much Money You Need in Retirement

Your living costs in retirement will largely be determined by the kind of lifestyle you plan to lead. In many cases, individuals and couples planning for retirement are hoping to maintain a similar standard of living to the one they’ve enjoyed at the end of their working years.

If this is the case, your advisor may plan for a retirement in which you are projected to spend a percentage of your current income—80 percent, for example, not factoring in inflation. Bear in mind that your own spending goals can greatly affect the amount of money you will need. 

Regardless of how much you plan to spend, your income sources in retirement must be capable of financing that standard of living throughout your golden years, with the assumption that you will go on to lead a long, happy life.

Project Net Worth Through an Asset Depletion Analysis

Once you’ve identified the amount of income you will need for retirement, an asset depletion analysis can chart the value of your retirement savings over time. 

This process can be very useful in determining whether you need to increase your retirement savings amount, push back your retirement, or adjust your goals if your current strategy is on pace to fully deplete your assets during retirement. At a minimum, any effective asset depletion analysis will map out projected income from all known sources—including retirement funds, pensions, Social Security, and other types of income—and evaluate the degree to which this income can support your planned retirement expenses.

An asset depletion analysis will also need to take into account increased costs over time (i.e., inflation) when considering your future living expenses. Although mortgage payments may be fixed, property taxes and homeowner association fees will rise. Expenses for food, entertainment, or communication services also see increases year-over-year. Generally, an inflation rate of three percent for non-medical expenses is an important part of the analysis parameters.

Medical expenses, on the other hand, may have an even higher inflation rate. The U.S. healthcare inflation rate may currently be at two percent, but historically it has trended at a long-term average of 5.26 percent. Thus, an asset depletion analysis should be able to model different inflation rates for different types of expenses.

Test Your Financial Security Through Scenario Planning

When performing an asset depletion analysis, it is important to account for significant events or circumstances that may affect the value of your assets during retirement. 

What happens if a recession hits several years into your retirement, and depresses the value of your holdings for the next five years? What if you or your spouse require increased medical care, such as assisted living or an in-home nurse? 

Empirical evidence has shown that a Monte Carlo simulation is an effective way to conduct this analysis. Monte Carlo simulations model a number of different scenarios based on the intervention of random variables and then use these various outcomes to predict the probability of any given scenario: in this case, what the likelihood might be of running out of money during retirement.

A Monte Carlo simulation can help you account for a wide range of scenarios and understand the risk and uncertainty you face when planning for the future on a fixed income.

Although the decision of when to retire and how to distribute your assets is ultimately up to you, this scenario planning can be very instructive as you work toward a retirement that offers stability in the face of many potential challenges or changes.

Make Adjustments to Keep Your Retirement Plan on Track

Based on the results of your asset depletion analysis and scenario planning, you may need to make changes to your current retirement strategy if you want to get back on track—or stay on track—with your current goals.

If you’re facing a potential financial shortfall later in life based on your asset depletion analysis, you may want to increase your retirement savings contributions or push back your retirement age to strengthen your financial position. Or, if you’re worried about unforeseen events disrupting your retirement plan, you may try and obtain a higher net worth in order to offer extra insulation against these potential pitfalls.

This revised plan can be worked out with your financial advisor and offer peace of mind as you move toward your retirement.

Don’t Enter Retirement Without Peace of Mind

As part of a larger financial planning and wealth management strategy, an asset depletion analysis is an important process that helps you track your saving process and keep your wealth management strategies aligned with your retirement goals.


Find out how an asset depletion analysis fits into our financial planning services—speak with a member of our team today.

Jeremy Lau

Jeremy L. Lau serves as Chief Executive Officer. He teaches the Investment Management course for California State University, Fullerton’s Trustee Certification Program and frequently speaks on fiduciary investing to attorneys and fiduciaries across various associations. Before joining Prudent Investors, he worked as an Executive Director in investment banking in Tokyo and Hong Kong for Deutsche Bank AG and UBS AG in structured credit and convertible bonds. He graduated in Accounting (with Honors distinction) from Brigham Young University and has earned the right to use the Chartered Financial Analyst (CFA®) and Certified Financial Planner (CFP®) designations.