If you find yourself with $1.5 million in retirement savings, you’re doing more than five times better than the average retiree, who only has $279,997. It is true that $1.5 million can last indefinitely in retirement if you don’t spend a cent, or it can last you one day if you buy a new yacht. How quickly you spend your money will have a large impact on how long it lasts, but so does where you keep it. Risky investments can make it disappear quickly, but keeping it “safe” in cash will make you actively lose against inflation. Working with a financial advisor can potentially help you maximize your savings and extend how long your money will last in retirement.
Determining How Much You Have
You may think that you have $1.5 million for retirement, but a closer inspection of your assets and income streams may make you realize you have more. Taking a thorough inventory can help you determine not only how long $1.5 million will last, but how much you can reasonably spend each year.
In addition to your $1.5 million, you may have other assets that can be used to supplement your income at a later date or will be included in your estate for your heirs. Other assets that should be considered in your calculation can include:
Real estate assets that can be used to provide rental income, sold at a later date or gifted to heirs, like vacation homes or investment properties.
Recreational equipment that can be sold or rented like boats, RVs, travel trailers and off-road vehicles.
The equity you’ve built in your home if you’re considering downsizing or moving to a cheaper area to reduce expenses.
In addition to income from your retirement accounts, you likely have other sources of income that will reduce the amount you need to withdraw to sustain your lifestyle. Other types of income you may have in retirement include:
Calculate how much you can expect on a regular monthly basis and subtract that from how much you’ve determined you need monthly from the monthly expenses section below. For irregular income or annual income like royalties or inheritances, you can choose to amortize it based on when you expect to receive it or disregard it from your planning altogether.
How to Determine How Much You Need Monthly
Most financial advisors agree that the average retiree will need to replace 80% of their pre-retirement income in retirement. That 80% is likely to be variable. Some years you may have weddings or trips to pay for and some you may stay at home.
Research from the University of Michigan’s Retirement and Disability Research center found that retirement spending declines over time across all socioeconomic levels. While you can expect to spend more on healthcare in your later years, you won’t be spending anywhere near as much as you did in your early retirement years of cruises, travel, dining and entertainment.
If you’re brand new to retirement, you can plan to spend 80% of your income monthly, but don’t panic too much if you’re spending more in some years, especially in the beginning. You spent your entire life saving for these years and it’s time to enjoy them while you still can.
Use a budget tracking tool like Mint, Personal Capital or You Need a Budget to plan and track your expenses. Schedule a quarterly check-in with your spouse to make sure that you’re spending where it matters most to you. Schedule an annual check-in or more often, speak with your financial advisor to make sure you’re still on track.
Investing for Retirement
It can be tempting to put all of your savings in cash when you’re nearing or in retirement. After all, cash doesn’t lose money, right? Wrong. Keeping your money in cash is the only investment that will actively lose you money because of inflation.
If you retire at 62, you can reasonably expect to live to 82 if you’re a man or almost to 85 if you’re a woman, according to data from the Social Security Administration. That means your $1.5 million portfolio needs to last at least 20 years, but it can also grow. Time is every investor’s friend.
Here’s how fast you would run out of money with each portfolio type, assuming you have a $1.5 million portfolio and withdrew $60,000 annually, taking out 3.8% more every year for inflation, which is the historical average annual inflation rate since 1960.
Withdrawing $60,000 annually from a $1.5 million portfolio kept in cash would cause you to run out of money in 18 years. While $1.5 million divided by $60,000 is 25 years, the inflation rate means that you would need to progressively withdraw more every year to have the same buying power and run out of money faster.
A $1.5 million portfolio consisting entirely of bonds meant to keep pace with inflation can reasonably be expected to last 25 years. While you’ll need to progressively take out more from your portfolio to have the same buying power, your portfolio should keep up with or even beat the inflation rate.
The average annualized rate of return of the stock market, as measured by the S&P 500, has historically been around 10%. Using that rate of return and still withdrawing $60,000 per year, increasing our withdrawal rate by 3.8% for inflation annually, a $1.5 million portfolio could last indefinitely.
But average annualized rates of return don’t tell the whole picture. Some years are down and some years are up. While the stock market as a whole does well over time, if you pick individual stocks you could lose it all. Diversifying in an index fund that allows you to own tiny slices of the whole stock market can help mitigate risk but doesn’t make stocks a safe bet.
If you lose a significant portion of your portfolio, panic and sell your investments, you’ve locked in a loss. If the stock market tanks right when you enter retirement and have increased expenses with higher withdrawals, your portfolio may never recover. Only you know your risk tolerance. Working with a financial advisor can help you determine the right way to invest your portfolio for long-term stability.
The Bottom Line
How long $1.5 million will last in retirement depends foremost on how quickly you spend money. If you have a steady and reasonable withdrawal rate and keep your portfolio invested in a safe and smart way, your money could last indefinitely. If you take out too much, especially in the beginning, invest it in volatile assets, or leave it in your bank account, you’ll likely run out of money before you’ve run out of time to spend it.
Tips for Retirement Planning
Working with a financial advisor can make all the difference in making sure you’re on the right track for how much money you’ll need in your golden years. Advisors can help you create a retirement plan and even manage your assets for you. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Taxes are another retirement consideration that shouldn’t be taken lightly. You may want to plan out where you live based on certain tax benefits. Here are the best states to retire for taxes.
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