Congratulations! Your retirement planning has paid off. You’ve built a million dollar retirement nest egg. In fact, 753,600 IRA and 401 (k) accounts supervised by Fidelity Investments had balances of $ 1 million or more as of June 30. So it is certainly doable. But how long will $ 1 million be in retirement?
The goal for most retirees is simple: not to run out of money. According to an Allianz Life survey, 61% of Americans admit that they are more afraid of surviving their money than of dying.
So if you’ve worked hard to plan for retirement and save, how do you keep your $ 1 million from expiring before you do? How quickly you spend your savings and how efficiently you invest are key factors in determining how long your $ 1 million will last in retirement.
Planning your retirement to make your $ 1 million last
Let’s say you are 65 and earn $ 115,000 per year. It’s a decent annual income, but not the king’s ransom. This is enough to allow you to rake in good sums of money each year. But it’s not that high that it exceeds income limits when it comes to saving in a retirement plan such as a 401 (k).
The simple arithmetic answer to the retirement planning question how long will it last is that your savings would last less than nine years. This is the number of consecutive years that you can subtract $ 115,000 from $ 1 million.
But less than nine years is not very long if you are healthy and have a normal life expectancy.
The average American life expectancy is now 77.3 years from birth in 2020, according to the U.S. Centers for Disease Control (CDC). But once you hit 65, you can expect to live another 19 years, according to the CDC.
That’s roughly the last life expectancy once the average American turns 65, according to CDC predictions. So if you retire at 65 and are typical, you can expect to live close to 84 years. Nine years of silver is simply not enough.
Put your retirement savings to work
But you can position your $ 1 million nest egg to last longer. Here’s how.
First, the simple arithmetic of dividing $ 1 million by $ 115,000 assumes that your nest egg will not grow over time.
In fact, it would certainly increase, with enough time. Investments accumulate profits. Even when the stock market goes down, it still bounces back.
So how have real investors behaved in recent years?
Real returns from Vanguard investors
Take workers with 401 (k) accounts and similar retirement savings plans managed by Vanguard. Plan participants whose portfolios were 70% invested in stocks and 30% in bonds posted average annual returns over the five years ended December 31, 2020 of 11.7%. The S&P 500 rose at an annual rate of 15.2%.
This is a reasonably representative period of time. There were bear markets as well as bull markets.
So, to strengthen your retirement planning, let’s use an average annual rate of return of 11.7% to forecast your portfolio behavior.
How far forward? Let’s say 19 years old.
Retirement planning that increases the balance of your nest egg
When we do that, after 20 years, your $ 1 million 401 (k) nest egg would skyrocket to $ 8.18 million, with an average annual return of 11.7%.
Round up to 20 years, and your final balance is even more enticing $ 9.12 million.
What if the market was only halfway as good as Vanguard investors? At an annual rate of return of 5.85%, you would still end up with around $ 2.9 million after 19 years, or $ 3.1 million after 20 years.
But that’s without subtracting money for your living expenses each year. Let’s incorporate this essential fact of life into our retirement planning here.
Start by determining how much money you have to withdraw.
The good news is that you wouldn’t have to withdraw the entire $ 115,000 each year. Part of your income would come from Social Security. The amount of benefits may change in the future. Federal budget deficits and weakened social security finances pose a risk to this income system.
But for now, with income of $ 115,000 this year at age 65, you can expect to receive $ 27,733 in Social Security benefits as of this year, according to the Bankrate.com calculator.
Your responsibility in addition to social security
This means you need to find $ 87,267 in savings, pay out from whatever work you do, and other sources if you want to keep your same income in retirement. For the sake of simplicity and because you might not want to work in retirement, let’s say everything has to come from your savings.
And what about inflation? Cost of living increases are built into social security – at least for now.
And the US inflation rate is 5.3%. It is unlikely to stay that high. The economic rebound from the depths of the coronavirus pandemic has thrown rocket fuel on the rate of inflation over the past 12 months. But to be on the safe side, let’s say your savings withdrawals – which start at $ 87,267 – increase by the same amount per year.
Where is all this taking you?
Save money over the past 19 years?
If your retirement portfolio grows by 11.7% per year as the accounts of these Vanguard clients did, after increasing annual withdrawals to offset inflation, your savings will be reduced to zero after 19 years, according to Mortgagecalculator.com.
It makes sense on paper. But that might not be good retirement planning for the real world. It offers no safety margin with a life expectancy of 19 years from the age of 65.
How can you make sure your nest egg lasts long enough? How do you make it last, say, 30 years, building a cushion in case you live longer than average?
You achieve this by investing more aggressively than a typical Vanguard retiree. Instead of a 70 to 30 stock / bond mix, you could increase your stock allocation to, say, 100%. Vanguard investors investing 100% in the S&P 500 were earning 15.2% per annum.
At this rate of growth, your initial nest egg of $ 1 million will never run out. It will always stay ahead of an inflation rate of 5.3%.
An alternative retirement planning strategy would be to reduce the amount of money you withdraw from your retirement nest egg.
You could cut withdrawals because the average American cuts spending in retirement. Or because you expect to make money from a part-time or full-time job.
Your budget has a lot of moving parts
And remember that a cut in spending doesn’t have to mean a drop in your standard of living. In your seventies, for example, you might not need to spend that much on getting to work or getting dressed.
In addition, if your goal is to replace only 90% of the non-Social Security portion of your annual pre-retirement income from savings, this will also allow your portfolio to last longer.
Check it out. If you only withdraw $ 78,540 per year while your account is earning 11.7% on average by Vanguard investors on a mix of stocks and bonds, with 5.3% inflation, your nest egg is $ 1. million dollars will last 23 years and five months.
It’s better retirement planning. And you can also improve yourself.
What if you replaced only 80% of the non-Social Security portion of your pre-retirement budget with deductions? If you only withdraw $ 69,814 per year, your portfolio will last 31 years.
Pension plan that preserves your portfolio for more than 30 years
In all of these strategic scenarios, if you invest in stocks, mutual funds, and ETFs that generate dividends, you won’t have to liquidate that many stocks to fund cash withdrawals. It will also make your wallet last longer.
The answer to the question of how long will $ 1 million be in retirement? With smart retirement planning, you can position your portfolio to outlast you.
Follow Paul Katzeff on Twitter at @IBD_PKatzeff for personal finance advice and active mutual fund managers who outperform the market by selecting the best performing growth stocks.
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