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How Long Will Your $1 Million Last In Retirement?

Congratulations! Your retirement planning paid off. You built a $1 million retirement nest egg. In fact, 753,600 IRA and 401(k) accounts overseen by Fidelity Investments had balances of $1 million or more as of June 30. So it’s certainly doable. But how long will $1 million last in retirement?




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The goal for most retirees is simple: Don’t run out of money. A whopping 61% of Americans admit they are more afraid of outliving their money than they are of dying, according to an Allianz Life survey.

So if you’ve worked hard at retirement planning and saving, how do you keep your $1 million from expiring before you do? How fast you spend down your savings and how effectively you invest are key factors in determining how long your $1 million will last in retirement.

Retirement Planning To Make Your $1 Million Last

Let’s say you’re 65 years old and earn $115,000 a year. That’s a decent annual income but no king’s ransom. It’s enough to let you sock away good chunks of money each year. But it’s not so high that it trips over income limits when it comes to saving in a retirement plan such as a 401(k).

The simple arithmetic answer to the how-long-will-it-last retirement planning question is that your savings would last less than nine years. That’s how many years in a row you can subtract $115,000 from $1 million.

But less than nine years is not very long if you’re healthy and have a normal life expectancy.

The average American’s life expectancy is now 77.3 years from birth, as of 2020, according to the U.S. Centers for Disease Control (CDC). But once you make it to age 65, you can expect to live nearly another 19 years, according to the CDC.

So, if you retire at age 65 and you’re typical, you can expect to live to nearly 84. A retirement nest egg big enough to provide just nine years of income? That simply does not cut it.

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Put Your Retirement Nest Egg To Work

But you can position your $1 million nest egg to last longer. Here’s how.

First, the simple arithmetic calculation of dividing $1 million by $115,000 assumes that your nest egg would not grow over time.

In fact, it certainly would grow, given enough time. Investments rack up earnings. Even when the stock market falls, it always rebounds.

So how have real investors fared in recent years?

Actual Returns By Vanguard Investors

Take workers with 401(k) accounts and similar retirement savings plans run by Vanguard. Plan members whose portfolios were invested 70% in stocks and 30% in bonds had average annual returns in the five years ended Dec. 31, 2020 of 11.7%. The S&P 500 grew at a 15.2% annual pace.

That’s a reasonably representative period of time. It had down markets as well as up markets.

So in beefing up your retirement planning, let’s use an 11.7% average annual rate of return for forecasting how your portfolio would behave.

How far forward? Let’s say 19 years.

Retirement Planning That Grows Your Nest Egg Balance

When we do that, after 19 years your $1 million 401(k) nest egg would skyrocket to a sweet $8.18 million, growing at an 11.7% average annual return.

Round up to 20 years, and your end balance is an even more mouthwatering $9.12 million.

What if the market does only half as well as it has for Vanguard investors? At a 5.85% annual rate of return you’d still end up with about $2.9 million after 19 years, or $3.1 million after 20 years.

But that’s without subtracting any money for your living expenses each year. Let’s plug that essential fact of life into our retirement planning here.

Start by figuring out how much money you’ve got to withdraw.

The good news is you would not have to withdraw the entire $115,000 each year. Part of your income would come from Social Security. The size of benefits could change in the future. Federal budget deficits and the weakening condition of Social Security’s finances pose a risk to that income system.

But for now, with $115,000 income this year at age 65, you could expect to receive $27,733 in Social Security benefits starting this year, according to the Bankrate.com calculator.

Your Responsibility In Addition To Social Security

That means you’ve got to come up with $87,267 from savings, pay from any work you do and other sources if you want to keep your same income in retirement. For simplicity and because you may not want to work while retired, let’s say it all must come from your savings.

And what about inflation? Cost-of-living increases are built into Social Security — at least for now.

And the U.S. inflation rate is 5.3%. It’s not likely to stay that high. The economic rebound from the depths of the coronavirus pandemic tossed rocket fuel onto the inflation rate over the past 12 months. But to be conservative, let’s say your savings withdrawals — which start at $87,267 — rise by that much a year.

Where does all of this leave you?

Make Savings Last 19 Years?

If your retirement portfolio grows at 11.7% a year the way those Vanguard customers’ accounts did, after boosting annual withdrawals to make up for inflation, your savings will run down to zero after 19 years, according to mortgagecalculator.com.

That makes sense on paper. But that may not be good enough retirement planning for the real world. It does not provide any margin of safety with a life expectancy of 19 years from age 65.

How do you make your nest egg last long enough? How do you make it last, say, 30 years, building in a cushion in case you live longer than average?

You reach that goal by investing more aggressively than a typical Vanguard retiree. Instead of a 70-30 stocks-bonds mix, you could boost your stock allocation to, say, 100%. Vanguard investors investing 100% in the S&P 500 earned 15.2% a year.

At that rate of growth, your original $1 million nest egg will never run out. It will always stay ahead of a 5.3% inflation rate.

Plan B?

An alternative retirement planning strategy would be to trim the amount of cash you withdraw from your retirement nest egg.

You could trim withdrawals because the average American cuts spending in retirement. Or because you do expect to earn money from some job, part- or full-time.

Your Budget Has A Lot Of Moving Parts

And remember, a cut in spending does not have to cause a decline in your standard of living. In your seventies, for instance, you may not need to spend as much to commute to work or on business attire.

Also, if you only aim to replace 90% of the non-Social Security portion of your preretirement annual income from savings, that will also enable your portfolio to last longer.

Check it out. If you withdraw only $78,540 a year while your account earns the 11.7% averaged by Vanguard investors on a 70-30 stocks-bonds mix, amid 5.3% inflation your $1 million nest egg will last 23 years and five months.

That’s better retirement planning. And you can improve on that too.

What if you replace only 80% of the non-Social Security part of your preretirement budget through withdrawals? If you withdraw just $69,814 annually, your portfolio will last 31 years.

Retirement Plan That Preserves Your Portfolio More Than 30 Years

In all of these strategy scenarios, if you invest in stocks, mutual funds and ETFs that generate dividend yield, you won’t have to liquidate as much in shares to fund cash withdrawals. That also will enable your portfolio to last longer.

The answer to the question of how long will $1 million last in retirement? With smart retirement planning, you can position your portfolio to outlast you.

Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about personal finance and active mutual fund managers who outperform the market by picking top-performing growth stocks.

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