Many retirees are realizing a million dollars isn’t what it used to be. Therefore, a lot of 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, other income sources, and the amount you need to live all determine how much you need to retire.
If you’ve seen my Retire Certain YouTube channel or read other articles here on my website, you already know I think cookie cutter formulas cannot be relied on for something as important as not running out of money in retirement. The fact is that everyone’s situation in different, and this fact defies cookie cutter rules. Therefore, 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, plus some important and frequently overlooked factors that can make or break retirement plans.
While I’m officially an AFC®, this article is based on 40 years of personally investing in stocks and navigating our finances through my husband’s early retirement from employment over 20 years ago when we saw that investment income from bonds and stock dividends may not sustain our desired lifestyle in retirement. This was waaaay before early retirement was vogue.
Run Out Calculator with 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 calculator is very simple but will allow you to enter your own data to evaluate whether 1.5 million is enough to retire for you personally.
Open the Run Out Calculator here.
Enter your information as I walk you through it. (Don’t worry – I can’t see anything you enter:) (We’ll use 1.5 million since that amount is the topic of this article but you can enter $1.5 million or any other amount you have in your investment account.)
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 factors.
|Retirement Savings||1.5 Million|
|Rate of Retirement Withdrawals||3%|
|Amount of Retirement Withdrawals/Month||$3,750|
|Balance Remaining After 30 Years||$400,000|
Step 2 is to enter your desired Retirement Withdrawal Rate into the Run Out Calculator.
The withdrawal rate in the 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 planning for how much money you need to retire. That’s because these factors are out of your control, making it feel stressful. 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 we have, the better results tend to be since no one wants to put in effort for something that is completely out of their control.
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 this common retirement withdrawal percent of 3% led me to use $3,750 to explain the math given in this article.
Note that the traditional retirement withdrawal method is based on the retirement account value each year and it will be adjusted for inflation which you’ll do in another step.
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 the long term average for inflation is about 3%. In my lifetime, inflation has ranged from negative to 13%, however.
You can view historical inflation rates and decide what you want to use for projected inflation.
In this exampe, I’ll use a 3% inflation rate since it is the long term average vs trying to guess what inflation will do.
It’s also important to point out that when the Federal Reserve implements quantitative easing (increases the money supply) as they did for well over a decade, it produces inflation.
For this reason, many financial advisors suggest using 4% to plan for future inflation. Of course, it was in the early 1980s that 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% since this rough estimate doen’t even include 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 in 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, the return from 1970 through early 2023 for a 60% stock and 40% bond portfolio was about 9.2%.
I’d like to stop here on an optimistic note but there’s a lot more to say about that 9.2% annualized long term return that I need to address as a responsible financial coach.
How Much Return Can I Expect on My Investments?
Before planning on an investment return of 9.2%, let’s see why this isn’t safe to do in retirement planning. We always need to look at the current big, or macro economic situation, and consider what’s likely based on where we are now when planning for retirement and investing.
First, interest rates were in a long term decline many of the years from 1970 through 2020. This means interest rates and the compounding of interest rates alone made up a lot of that 9.2% 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.
While this is counter intuitive, long economic expansions tend to fuel overvalued stock markets, which eventually end in bear markets and stock market losses.
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 an otherwise solid retirement plan.
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, I remember that 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 you’re invested
- Where you’re invested
- What the economy does
- What the financial markets do
This is, of course, unless you’re invested in some sort of fixed return product, such as an annuity.
Most investors are “buy and hold” investors in a traditional stock and bond portfolio, however. More investors have learned the value of owning at least some more defensive assets besides bonds in recent decades, though. 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 said about how much to expect from investments in stocks and bonds over the 2019-2019 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. And remember, inflation makes up some of our investment returns so there’s not “real 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.
With both stocks and bonds having declined in 2022, it seems like these lower return predictions are playing out.
As humans, we gravitate toward the more promising higher returns. It’s no fun to plan for 1.5 to 2% returns after expenses and inflation, especially after experiencing 10% returns!
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.
There are always challening economic factors, but now seems to be particularly challenging with the 40 year interest rate decline having ended in the early 2020’s.
Declining interest rates and Federal Reserve intervention have been tailwinds for investment returns, and now we investors face serious headwinds.
Given this, I personally now use investing strategies I chose from Allocate Smartly that rotate into stocks, bonds, and other assets instead following a simple stock-bond buy and hold strategy “no matter what”. The strategies I use have had annualized returns of around 13% with considerably less risk than a 60/40 stock and bond buy and hold strategy based on about 50 years of reliable back testing data.
Given this, I personally plan for a withdrawal of 5%. As explained in my Allocate Smartly review, fortunately they have data for retirement withdrawal planning for the portfolios on their website.
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 due to 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 estimating future 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 retirement savings data into the Run Out Calculator you see that you will run out of money, don’t despair.
There are still many ways to increase investment returns, build wealth, and create new income streams.
Also, by creating income streams before retirement, the amount you’ll need to save can be dramatically reduced. This may include something as simple as part-time employment, buying income generating assets like we did, starting a small business that suits your personality, or using more advanced investing strategies such as selling covered calls on ETFs or stocks you already own.
The math reveals that generating only $1,666 a month in “extra” income is like having another half a million dollars in retirement savings if you’re planning on a 4% retirement withdrawal.
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’ll want to also consider all possible 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 investment decisions can also make or break a retirement plan.
Making wise decisions around the things you can control 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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