There are few hard and fast rules when it comes to retirement finance, but one is this: if you want to see how much you can spend each year, divide your wealth by 32. That’s the current annuity factor, a number based on inflation-adjusted interest rates that helps you figure out how much $1 of spending will cost over a prospective 30 years of retirement.
Real interest rates, which protect you from inflation, have fallen in recent years, making it more expensive to finance future spending — at today’s negative rates, ensuring you have $1 to spend in 30 years costs $1.01 today. That change in real interest rates has also driven up the annuity factor by 13% since January 2020.
An Example
Think about it his way: Suppose you had $500,000 in January 2020 when the annuity factor was 28. That meant you could afford to spend $17,500 a year in retirement. By May 2021, if you invested all your money in the stock market, you’d have $646,000, a 30% increase. But your spending capacity only increased 14%, to $20,000 because the annuity factor jumped to 32.