Million-Dollar Retirement? Here’s How It Might Work

401(k)
Congratulations! Your retirement planning paid off. You built a $1 million retirement nest egg. How long will $1 million last in retirement?

In Retirement, income is the only outcome that matters.  For most retirees, the goal is simple: don’t run out of money. That’s the worry that plagues most Americans—61% of them, according to a survey from Allianz Life. How do you keep that $1 million from running out before you do, asks Investors Business Daily in the article “How Long Will Your $1M Last in Retirement?”

Let’s use this example. A person is 65 years old, earning $115,000 annually. It’s not a king’s ransom, but it’s a decent income. They sock away a good-sized amount of money every year, but not so much that they reach income limits in a 401(k) or similar retirement plan.

The simple answer to the how long will $1 million last is less than nine years. That’s if the person spends $115,000 a year from the $1 million.

The average American life expectancy is now 78.6 years, as of 2017, according to the CDC. However, if you make it to 65, you’re more likely to make it to 20 more years. For the average person, that means living to around 85. Retirement funds in this case, which is admittedly an average, will need to last twenty years. Will they?

That nest egg isn’t done growing, just because you’ve turned 65. Given enough time, even including setbacks in the market, you’re likely to have a nest egg that keeps growing over those twenty years. If you use a 5.6% annual rate of return for forecasting how your portfolio will do, you may be in better shape than you thought.

A 5.6% return would grow your portfolio to $2.97 million, even at a 5.6% growth rate. However, that’s without subtracting any money for living expenses every year. Let’s plug that in.

You’ll be getting Social Security, so you won’t be taking out $115,000 ever year. While the size of benefits may change in the future, there will still be income. For a 65-year-old earning $115,000, expect to receive about $27,815 from Social Security annually.

That’s $87,185 to maintain your current lifestyle, from retirement savings, any part-time income or other sources. Let’s say you don’t want to work, and it all has to come from savings. Don’t forget inflation, which will come in at some point. U.S. inflation is now 1.7%.

It looks like your $1 million will last about fifteen years now. Will that be enough? Downsizing to cut housing costs will help, as would part-time employment. You should also make sure that you have long-term care insurance to protect you and your family from one of the biggest health care costs.  However, people with $1 million can pat themselves on the back—well done!

Reference: Investor’s Business Daily (Oct. 28, 2019) “How Long Will Your $1M Last in Retirement?”

 

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