A million dollars no longer guarantees a comfortable retirement complete with cruises and luxury cars.
How long will a million dollars last in retirement? In this post, you’ll see.
The inspiration for this article comes from working with a 55-year-old wealth coaching client who was wondering how long her million dollars would last in retirement. Let’s dig in to find out.
Retirement Distribution Calculator
The first step is to go to a simple calculator. I found one I think you’ll like on Key Banks’s website here. (I have no affiliation with Key Bank.) Enter a million dollars in the first field.
You can, of course, obviously enter any amount you have saved for retirement to see how long it will last:)
Below is an image of the retirement withdrawal calculator with the data I explain in this post so read below the image as I step through the data I entered.
That was easy, as is the next step if you have your finances in order.
Spending in Retirement
The next field asks for the amount you’ll withdraw in retirement. This will be the amount you plan to spend in retirement, less other expected income sources.
For example, if you plan to retire after 65 (or you choose to take social security early), you’ll have social security if you live in the United States.
If you plan to retire early, then you won’t consider social security in your spending equation. If you have other income sources, such as real estate rentals, you’ll want to consider these.
If you’re curious about the best income stream to start before retirement, watch my video below.
If you’re not sure how much money you spend, you’ll want to calculate your monthly expenses now.
Without this, it’s impossible to plan and strategize, an important element in building wealth.
You can see the first two fields in the retirement withdrawal calculator are numbers under your control, even though it may not always feel like it.
In the retirement withdrawal calculator example here, I assumed an annual withdrawal of $40,000. This was based on The 4% Rule, a common, albeit somewhat dated retirement withdrawal method. You can read more about this in my post on Retirement Withdrawal Strategies .
After–Tax Rate of Return
The after–tax rate of return hits us with two entries that require some analysis and perspective.
Rate of Return
There is just no way to know for sure how much your investment return will be in the future unless you have the full million dollars in some type of investment that ensures a fixed return.
Remember, there are three elements to the investment return for stocks and most other liquid investments that make the return difficult to predict.
- Income – Dividends and Interest
- Growth – Increase (or Decreases) in the Value of the Securities
- Compounding of the Above
And, unfortunately, all three of the elements are unknowns. I’ll address how to overcome this later in this post. Let’s continue estimating the return that you might enter in the calculator when you try it.
Bond Returns
While you may know that a bond portfolio yields 4%, the value of the bonds will usually increase or decrease, depending on the type of bonds and how you own them (in a fund or individually).
And the yield can also vary, again, depending on whether you own the bonds outright yourself or if you are invested in some type of bond fund. (You probably know that a yield is a measure of the income you get from an investment. Read more about bonds in my post Risks of Income Investing. )
Stock Returns
Similarly, your stock portfolio may have a dividend yield of 4%, but the value of the stocks that deliver those dividends will go up and down affecting capital gains or growth.
Not only this, but stock dividend yields change based on the company profits and other factors.
Insurance Investments
These challenges drive many investors to buy insurance products that deliver a sure return, assuming the insurance company remains solvent, which they almost always do.
While it sounds like an insurance product with a guaranteed return may be the best way to go, it’s important to weigh the added cost of such a product and the relinquishing of potential higher returns against the return certainty that the insurance product delivers.
Plan B
All of this uncertainty is why we decided to create diversified multiple income streams in to enhance our investment income from stocks and bonds. There are many ways this can be done, including real estate, covered calls and online businesses to name a few that we are using.
Read my related post How Many Income Streams Should I Have?
But even with diversified income streams, we still want to estimate returns from our more traditional investments. Let’s cover how to address all of the uncertainty next.
Math, Probability and Estimates
The great news is that with all of the uncertainty, we can look to history to get a reasonable estimate for investment returns. If we don’t do this, we have nothing, and estimates are way better than not planning for retirement.
And when we use facts and historical data we can make some very decent estimates as to how long a million dollars will last in retirement, or any other amount you have saved.
Investment Return Challenges
Notice that I used a fairly optimistic 5% after tax rate of return in the investment calculator example here. (See the image above.) You may be correctly thinking that that over decades stock total annual stock returns (before taxes) are around 10%.
But there are two more important factors that have a strong influence on estimating investment returns making it so we can’t necessarily (and safely) use the 10% total annual stock market return number from the past in planning for the future.
Time and Stock Market Returns
The first factor that complicates future investment return estimates is time.
For example, if you’re planning to retire at 65, and think you’ll live to 90, you’ve got a solid 25 years for your investments to average to positive returns, grow, and compound.
And if you’re planning to retire at 55, you’ve 40 years for your investments to average to a positive return and compound before you retire.
But when planning for less than a couple of decades, predicting investment returns get tricky. Remember, stocks have had negative returns over some 10 years periods.
The good news is that how the markets have performed in the years leading up to retirement are a big factor in how they will perform in subsequent years.
For this reason, it can make a lot of sense to consider what the market has done in the years leading to retirement as I explain more ahead.
Here is a post I wrote, entitled What Will Stocks Do Over the Next 10 Years? with 5 opinions from experts which I respect about future investment return estimates.
Investment Growth During Retirement
Now, there’s the time leading up to retirement, but what we’re really looking at with this calculator is how much your money is growing (hopefully) while you’re retired.
In other words, if you’re withdrawing only 4% a year, the other 96% in your investment account is, ideally, growing and compounding. And if it is well invested, it is increasing in value at least most of the years.
In other words, if you’re retiring at 55 and plan to live to 90, the probability is that your money will grow during those 35 years enough to offset your retirement withdrawals. This is how the retirement withdrawal plan “should” work.
Life Expectancy
Let’s face it. Most of us won’t live to 90, but it’s hard to plan for fewer years since many of us, or a spouse, will!
This is especially true with all of the sometimes–expensive methods to keep us alive nowadays, even though we may be ready to depart this earth, if I may write bluntly.
The next consideration is an easier factor than estimating investment returns so hang in there.
Diversification
Most investors have investments in both U.S. Treasury bonds and stocks. And U.S. Treasury bonds almost always go up when stocks are in a bear market.
Read my post What Goes Up When Stocks Go Down for more on this. This is another reason we won’t use that 10% historical total annualized return the stock market delivers over long periods of time: Because bonds have lower returns based on historical data.
And by averaging stock returns with bonds returns and, likely, money market returns for a portion of your wealth, the return won’t be 10%.
Taxes on Investment Returns
Taxes are another variable that affect investment returns that must be considered since this calculator seeks after tax investment returns.
Retirement Account Structure
You may have structured your retirement savings account so that none of your withdrawals or returns are taxed in something like a Roth IRA.
If you’re like most investors, however, you’ll have some taxable investment returns and some nontaxable investment returns.
This is a broad topic that is different for every investor. You’ll want to consult with a good CPA to make sure you have structured your retirement savings in a way that you can save the most on taxes.
Tax Rates
The other variable that affects taxes on investment returns is the tax rates that will be in effect after you retire. In addition to tax rates, the tax policies in effect are yet another factor for which we have to estimate when using a retirement withdrawal calculator.
These are both big unknowns, which is another excellent reason to structure your retirement accounts in the most tax beneficial way.
Speaking of taxes, as of this writing, we are experiencing historically low tax rates, so it could be time to take advantage of implementing strategies that will save money in taxes. For example, after some analysis, I recently converted a Traditional IRA to a Roth IRA.
Do some number crunching or check with your CPA to see if this could make sense for you .
Conservative Vs Aggressive Estimated Rate of Return
Forgive me for fire hosing you with information after promising a simple calculator.
As always here on Retire Certain, I refuse to gloss over the reality of investing to make it easier than it really is or in order to have a one size fits all answer.
When it comes to your money, a one size fits all answer doesn’t exist and I try to be honest about that.
Maybe it’s the old accountant coming out in me but I think it’s better to be very conservative in your expected investment return estimates. It’s better to be pleasantly surprised than to run out of money when you’re 85.
As always, history tell us a lot. At the end of the late 1990’s, honest financial experts were saying to plan for low returns from stocks in the first 2000’s decade following the strong rising stock market of the 1990’s. As it turns out, they were right.
The S&P 500 had an annualized return of -.95% including dividends for the 2000-2009 decade. The next decade, very logically, had stellar stock market returns again. And remember that U.S. Treasury bonds almost always go up when stocks experience a nasty bear market.
When you’re trying to plan for investment returns, look to what stocks have done in recent years, and what the economy is doing at any time you’re looking to invest, especially if you are over 50.
And when investing, undervalued assets will naturally help reduce risk from being heavily invested in overvalued markets.
Inflation
The last entry to see how long one million dollars will last in retirement is inflation.
Inflation decreases the value of your money. Historically, inflation has averaged 3%. In more recent decades, it has averaged 2%. If you have inflation hedges, such as real estate or many stocks, you have less risk of inflation hurting you.
Notice I used a 3.1% inflation rate and here is why. Inflation data from the government excludes food and energy. Food is one of the areas where I think I experience inflation the most. Plus, food is something we obviously won’t do without.
For us, groceries also makes up a large portion of our spending since we don’t dine out much. In addition to economic inflation, there’s also lifestyle inflation. I don’t buy into the common strategy to lower expenses after we retire. I plan to live well, if not better, as I age.
Maybe I won’t, but I am planning for it. This is lifestyle inflation.
Summary for How Long One Million Lasts in Retirement
As you can see, the calculator is simple when you’re on top of your spending, and you’re an educated investor so you can enter good data for reliable estimates.
You can see that, based on the estimates I entered for the reasons explained above, one million dollars would last just over 44 years in retirement for someone withdrawing only $3,333 a month adjusted for inflation after year one.
At a minimum, after reading this post, you’re now tweaking your spending, maximizing your investment returns within your acceptable risk level and strategizing.
And remember, if it looks like you aren’t on the path to retire comfortably, you can always go to Plan B like we did and create alternative income streams which lowers the stress around having to save more or run out of money.
The best place to start is with my Ultimate Wealth Plan. You can get it here now.
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