Many retirees are realizing a million dollars isn’t what it used to be. Therefore, many investors are now looking to retire with more than originally planned.
Is 1.5 million enough to retire? The math shows if you’re using a 3% retirement withdrawal rule, and can live on $3,750 a month plus other income sources, $1.5 million could be enough to retire.
As you can see, the retirement withdrawal method you use, monthly expenses and the amount you need to live each month are all factors worth exploring more.
In this post, I’ll show you how to see if 1.5 million is enough for you to retire based on your own situation.
While I am officially an AFC®, this article is based on almost 40 years of personally investing in stocks and navigating my family through my husband’s early retirement from employment over 15 years ago when we saw that bond and dividend income may not sustain our desired lifestyle in retirement.
Run Out Calculator on 1.5 Million
We’re going to step through the Run Out Calculator here on the Retire Certain website to explore further how much you need to retire. This is very easy and will allow you to enter your own data and make an evaluation as to whether 1.5 million is enough to retire for you personally.
Open another RetireCertain.com in a separate tab. From the Calculator menu at the top, open the Run Out Calculator from the drop down menu so you can enter your information as I walk you through it here. (Don’t worry – I can’t see anything you enter:)
Step 1 – Enter $1,500,000 into the Run Out Calculator in the Savings Balance field as shown below. The rest of this post will step you through the remaining 4 fields.
You’ll see that there are only 4 factors to consider beyond the 1.5 million dollar investment account which is already known.
Let’s delve into each of these factors to see if 1.5 million is enough to retire based on your own situation.
|Retirement Savings||1.5 Million|
|Rate of Retirement Withdrawals||3%|
|Amount of Retirement Withdrawals/Month||$3,750|
|Balance Remaining After 30 Years||$400,000|
Run Out Calculator Withdrawal Field
Step 2 is to enter your desired Withdrawal Rate into the Run Out Calculator.
The withdrawal rate in this Run Out Calculator is the only field entry that is truly under your control other than the retirement savings balance you’re planning to have.
It’s a great thing that this is under your control because by controlling your spending in a way that supports your retirement goals, you increase the odds of retiring comfortably.
The amount you’ll need to withdraw is a function of your spending.
If you don’t know your monthly expenses, get clear about what they are, and enter the amount into the Run Out Calculator.
While you’re evaluating your expenses, omit expenses that are less important than having the 1.5 million to retire. Looking at it in this way will help prioritize the choices you’re making with your life and your money.
It’s easy to feel like a victim of the stock market or your employer when considering how much money you need to retire. That’s because these factors are out of your control. When you view your spending from a choice perspective, however, you’re in the driver’s seat, which leads to feeling more confident about your retirement savings. It also leads to better results.
The more control we realize that we have, the better results tend to be since no one wants to put in the effort for anything for which they can’t change the outcome.
3% of 1.5 Million Dollars
For this example, I am going to enter $3,750 into the monthly withdrawal field. This is 3% of the retirement savings of 1.5 million dollars.
Using a common retirement withdrawal method of 3% led me to use $3,750. Note that the traditional retirement withdrawal method is based on the retirement account value each year and it will be adjusted for inflation. Don’t worry, this calculator also, however, adjusts for inflation.
Note that in using the retirement withdrawal method, the amount withdrawn will be adjusted for actual inflation, not just estimated inflation, as the years go by in retirement as addressed more below.
Run Out Calculator Assumptions
I like that this calculator uses the word “assumptions”. It’s super important to realize that retirement planning is mostly based on assumptions, the biggest of which is how long you’ll live.
The fact that retirement planning is based on pure assumptions and estimates is often forgotten in our natural tendency as humans to desire controlling risk.
The rest of this post will address the remaining 2 fields in the Run Out Calculator, which must be based on estimates, or assumptions.
Do Retirement Withdrawals Increase with Inflation?
Yes, you’ll need to increase retirement withdrawals for inflation in order to maintain your standard of living.
Step 3 is to enter the Yearly Withdrawal Increase for Inflation into the Run Out Calculator
In this field, you’ll enter the inflation rate for which you want to plan your withdrawals.
If you’re wondering how to account for inflation in retirement planning, know that long term inflation rates are 3% and more recent inflation has been around 2%.
You can view historical inflation rates and decide what you want to use for projected inflation.
You may also want to read a good Forbes article about why the reported rate of inflation is not accurate. It’s an older article but the information is still relevant and important for anyone planning for retirement.
Because I like to be super conservative in my estimates, I’ll use a 3% inflation rate in this example. I had rather end up with extra money than run out of money.
It’s also important to point out that when the Federal Reserve implements quantitative easing (increases the money supply) as they have been doing for well over a decade, it can produce inflation.
For this reason, many financial planners suggest using 4% to plan for future inflation. Of course, in the early 1980s. inflation exceeded 13%!
I understand that inflation can seem like a vague concept but it’s incredibly important in retirement planning. Why does inflation matter so much in seeing if 1,5 million is enough to retire? Inflation depletes the value of your money. As a result, the $3,750 withdrawal wouldn’t buy as much as it currently does after it is adjusted annually for inflation.
Just think how much the value of money deteriorates over time from inflation when it is compounded at 3% every year. After 10 years in retirement, the value of your money will have decreased considerably more than 30% based on an annual inflation rate of 3%, and that’s before we consider the compounding effects!
Savings Interest Rate = Investment Return
Step 4 is to enter the Savings Interest Rate.
The Savings Interest field is probably the biggest unknown in the Run Out Calculator if your investments are invested in the stock market or even the bond market.
What’s referred to as “savings interest rate” is really the return you expect to get on your retirement savings.
To give you some perspective, a return since 1970 for a 60% stock and 40% bond portfolio is about 9.7% through late 2020.
How Much Return Can I Expect on My Investments?
Before planning on an investment return of 9.7%, let’s see why this isn’t safe to do in retirement planning.
First, interest rates have been in a long term decline since the 1970’s. This means interest rates made up a lot of that 9.7% portfolio return.
Second, it’s really important to note that for retirees entering retirement around the end of a long economic expansion period, lower investment return projections are more realistic.
Overvalued stock markets must correct to more normal valuations by first dropping significantly below those normal valuations. Sometimes the drops are significantly below the mean and other times they result in a stock market crash.
In fact, Sequence of Returns Risk states that if retirees face bear markets or poor investment performance in the years just before or just after retirement, it can be detrimental to retirement savings.
How Much Will My Investment Return Be in the Future?
Now, to change your expectations a little and maybe dampen your hopes: At the end of the 1990’s decade, a few smart financial gurus were telling investors not to expect returns in the next decade like they got in the 1990’s.
Boy, were they ever right. The S&P 500 index returned -.95% including dividends and -2.72% not including dividends for the decade from 2000 to 2010. Ouch!
(And this was exactly when my husband “stumbled” into early retirement, as we like to say. I’m writing about this stuff because we lived it and invested through it, so I get it!)
This leads smart investors to ask the next question:
How Much to Expect from Stocks and Bonds Over the Next Decade?
The answer to that question depends on how and where you’re invested.
Most investors are “buy and hold” investors in a traditional stock and bond portfolio, even though more investors have learned the value of owning at least some more defensive assets besides bonds in recent decades. Given how popular it is, we’ll focus on a “buy and hold” strategy for now.
Let’s see what a top expert who is even older and way smarter than I am is saying about how much to expect from investments in stocks and bonds over the next decade.
Highly esteemed Vanguard Founder Jack Bogle predicted a 5.5% return on stocks over the 2019-2029 decade and 4% (3.8%) from bonds over the next decade.
This return projection excludes investment expenses, wealth management fees, and taxes, as well as inflation, meaning those expenses would need to be taken out. Remember, inflation makes up some of our investment returns.
Interestingly, this Morningstar YouTube video has limited views yet it is one of the most important YouTube videos on investing in 2019. If 2019 seems like a long time ago, as of this writing this projected return is more relevant than ever, if not a little too optimistic since stocks rose even more after 2019 and interest rates dropped more, too.
As humans, we gravitate toward the more promising higher returns. It’s no fun to plan for 1.5 to 2% return after expenses and inflation, especially after experiencing 10% returns!
Plus, recency bias drives investors to think that what has happened recently will happen again and plan accordingly. This can be a dangerous perspective, however.
Projected Return for This Example
Even though it’s painful, I am going to use a 4% projected return for buy and hold stock and bond investors in this example, and here is why.
Again, I am conservative in my estimates. First, it’s better to be pleasantly surprised with extra money in retirement than to run out of money in retirement.
Second, bull markets are followed by bear markets and vice versa. Since we are looking beyond the next decade with our retirement plan, there will likely be a mix of bull and bear markets during the time frame for which we’re estimating.
In other words, your retirement planning will likely span several decades in which the economy (and related stock market) can both flourish and flounder.
What interest rates will do could be even more unpredictable but it’s mathematically impossible that they can go much lower.
It’s worth admitting that in recent years I have been less of a buy and hold investor and more of a tactical investor. The strategies I use have had annualized returns of around 12% with less risk than a 60/40 stock and bond buy and hold strategy based on over 40 years of reliable back testing.
For this reason, I personally use a higher expected return. I do, again, however, think that 4% is optimistically realistic for “buy and hold” stock and bond investors.
Tax Field in Run Out Calculator
The tax field is wide open for estimation since it is a factor of your personal situation. Twenty two percent may seem high since as of this writing due to a qualified dividend tax rate of 15% and potential retirement account advantages.
On the other hand, state taxes are important to remember. Taxes could also rise.
This example is simply to show you how to use this Run Out calculator to estimate if 1.5 million is enough to retire. Check with your CPA if you want help with taxes, but in reality, no one can predict future tax rates.
Again, I like to overestimate rather than underestimate expenses, and underestimate investment returns to decrease the probability of running out of money in retirement.
Results for Retiring with 1.5 Million Dollars
In this example, as you can see, you’d be left with over $400,000 after 30 years of withdrawing the $3,750 monthly amount and beginning with 1.5 million to retire.
That’s good since you may live longer than 30 years after retirement.
As noted, your own numbers need to be entered into the Run Out Calculator since your monthly spending, taxes and expected return numbers will be based on your own situation.
If 1.5 Million Isn’t Enough to Retire
If, after entering your own data into the Run Out Calculator you see that you will run out of money, don’t despair.
There are many ways to increase investment returns, increase wealth and create new income streams. Click here to read my related post How to Build Wealth.
Also, by creating income streams before or in retirement, the amount you’ll need to save can be dramatically reduced. This may include something as simple as part-time employment, starting a side gig, or investing in higher yielding stocks.
For creating income streams before retirement, read the following posts:
Dangerous Omissions in Retirement Planning
It’s easy to forget about wild card expenses that can sabotage the otherwise logical plan we saw above to conceivably retire with 1.5 million. Examples of such wild card expenses are health care, medical insurance, long term care, disability, property taxes, or dependent care.
On the other hand, you also want to consider all potential advantages, such as extra income sources, inheritance, or unanticipated windfalls.
You don’t want to spend too little, but you don’t want to spend too much in retirement, or the time leading up to it, either.
The exception is that if you would be happy to leave money to heirs or a charity instead of spending all your retirement savings. In this case, spending too little will allow you to accomplish this worthy goal.
Again, the amount of money you need to retire is very personal. There is truly no cookie cutter retirement plan since everyone has different financial goals and lifestyle desires with varying expenses.
So, Is 1.5 Million Enough to Retire?
Only you can know if 1.5 million is enough to retire comfortably based on your lifestyle desires and your financial situation.
Working with what you can control, such as where you live and how much you spend is important. Making wise decisions around this will offset having to deal with the things that are beyond your control, such as inflation, the economy and the stock market.
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