How Long would 1M Last in Retirement?
A question on many retirees’ minds is, “How long will my retirement savings last?” This is crucial for anyone relying on fixed assets, especially when market volatility and inflation affect living expenses. For someone with $1,000,000 in retirement savings, withdrawing $5,000 per month before taxes, careful planning is essential. Let’s break down how long $1,000,000 might last, then review common strategies that help retirees make the most of their savings.
How Long Will $1,000,000 Last with a $5,000 Monthly Distribution?
With a $5,000 per month withdrawal rate, an individual would need $60,000 annually to support their income needs. If we assume no growth and no taxes, this would mean that $1,000,000 would last for approximately 16.67 years ($1,000,000 / $60,000). However, this scenario is unrealistic in real-life retirement planning due to factors like inflation, investment returns, and taxes. Here’s a look at how each factor affects the longevity of a $1,000,000 retirement portfolio.
Investment Returns: If your portfolio generates a modest 4% annual return, it can help offset the impact of regular withdrawals. Under this scenario, your savings might last closer to 22-23 years. However, achieving a 4% return is not guaranteed, and investment values can fluctuate.
Inflation: A 2-3% annual inflation rate erodes purchasing power over time. For example, if inflation averages 3%, the purchasing power of a $5,000 monthly withdrawal will halve in about 24 years. Factoring in inflation, your savings may be depleted sooner if income needs increase to keep pace with the cost of living.
Taxes: The tax impact on withdrawals depends on the tax-deferred status of the account (e.g., Traditional IRA or 401(k) vs. Roth IRA). For simplicity, assuming a 20% tax rate, net withdrawals drop to $4,000 per month, which impacts the overall lifestyle and purchasing power during retirement.
Taking these variables into account, let’s review some common strategies that retirees use to generate income while preserving their portfolio.
Traditional Income Generation Strategies
The 4% Rule
The 4% rule suggests that a retiree can withdraw 4% of their initial portfolio in the first year of retirement, then adjust the dollar amount for inflation in subsequent years. This rule was developed based on historical stock and bond performance, and it aims to make a retirement portfolio last 30 years.
However, the 4% rule has faced scrutiny in recent years, as market volatility and low bond yields create challenges for this traditional approach. Some experts now recommend a slightly lower initial withdrawal rate of 3-3.5%, especially in early retirement.
Systematic Withdrawals
Systematic withdrawals involve setting a specific dollar amount or percentage to withdraw each month or year, rather than following a strict rule like the 4% rule. Retirees can customize this based on current expenses and market performance. However, this strategy requires careful attention to the portfolio balance and market trends.
Bucket Strategy
The bucket strategy divides a retirement portfolio into different "buckets" based on time horizon and risk tolerance. For example:
Bucket 1: Short-term, liquid funds for 1-3 years, such as cash or short-term bonds.
Bucket 2: Medium-term assets (4-10 years), often invested in a mix of bonds and stocks for moderate growth.
Bucket 3: Long-term assets (10+ years), invested in higher-growth assets like stocks.
The bucket strategy allows retirees to spend from the safer, short-term bucket during downturns, allowing longer-term investments to recover.
Dividend and Interest Income
Many retirees invest in dividend-paying stocks or bonds to generate income while preserving principal. Stocks with stable dividend histories and high-quality bonds or certificates of deposit (CDs) can offer a relatively predictable income stream. However, high dividend yields can be accompanied by higher risks, and bonds are sensitive to interest rate changes.
Annuities
An annuity is an insurance product that can provide a steady income stream, often for life. For example, a retiree might invest a portion of their savings in a lifetime income annuity, which guarantees a monthly payment for life. However, annuities can be expensive, with fees and commissions, and they lack the flexibility of liquid investments.
Social Security
Although not a direct investment strategy, Social Security plays a critical role in retirement income planning. Delaying Social Security benefits can increase monthly payments substantially, which may allow retirees to draw less from their portfolios in the early years. For instance, each year you delay collecting benefits past full retirement age, up to age 70, can increase your benefit by about 8%.
Putting It All Together
When it comes to how long $1,000,000 will last in retirement, there’s no one-size-fits-all answer. The lifespan of your retirement portfolio depends on various factors—withdrawal rate, investment returns, inflation, and taxes. Here’s a sample approach combining some of the traditional income generation strategies:
Build a Base of Secure Income: For essential expenses, aim to cover these with guaranteed income sources like Social Security and, if appropriate, annuities.
Strategic Withdrawals: Consider starting with a conservative withdrawal rate, adjusting for inflation and expenses each year. Systematic withdrawals allow for flexibility, especially when combined with the bucket strategy.
Leverage Dividend and Interest Income: Use dividend income and bond interest as additional income, minimizing the need to tap into principal during positive market years.
Maintain a Growth Portfolio: Long-term growth investments, like stocks, help keep pace with inflation and replenish portfolios.
Planning for retirement is a delicate balance between ensuring income for today and securing assets for tomorrow. It’s wise to regularly review your portfolio with a financial advisor who can help adjust your strategies to meet your retirement goals and navigate market conditions effectively.
With a sound strategy, a retirement portfolio of $1,000,000 can provide a sustainable income that balances current needs with long-term growth potential.
Past performance is not a guarantee of future results. All investments contain risk and may lose value. Gracio Garcia is a Registered Representative and Financial Advisor of Park Avenue Securities LLC (PAS) 160 Gould Street, Suite 310, Needham, MA 02494, (781) 449-4402. Securities products/services and advisory services are offered through PAS, a registered broker-dealer and investment advisor. Field Representative, The Guardian Life Insurance Company of America (Guardian), New York, NY. PAS is a wholly owned subsidiary of Guardian. The Bulfinch Group is not an affiliate or subsidiary of PAS or Guardian. Life insurance offered through The Bulfinch Group Insurance Agency, LLC, an affiliate of The Bulfinch Group, LLC. The Bulfinch Group, LLC is not licensed to sell insurance. The Bulfinch Group is not registered in any state or with the U.S. Securities and Exchange Commission as a Registered Investment Advisor. CA Insurance License #0K24081; FL Insurance License #P179788. PAS is a member FINRA, SIPC. 7229697.1 Exp 11/26