Building up a nest egg of $1 million in retirement savings might sound like a fortune, but it’s within reach of many Americans who start saving and investing early in their careers. For example, if you invest 15% of a $60,000 salary into a retirement account for 30 years, earning an average of 8% in annual returns, you’d retire a millionaire.
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That said, $1 million doesn’t go as far as it used to. While it can be a comfortable retirement, it still requires careful budgeting to make sure your money lasts the rest of your lifetime.
“Retiring with $1 million in savings is totally possible today, but it takes thoughtful planning,” said Amber Schiffert, co-founder of Tara Wealth.
Here’s what $1 million in retirement savings could look like on a monthly basis in retirement.
How $1 Million Translates Into Monthly Retirement Spending
There are a few ways to approach drawing down your retirement savings so you have enough to live comfortably.
One strategy is the 4% rule, where you withdraw 4% of your portfolio each year, adjusting for inflation. With $1 million in retirement savings, “using the 4% rule, that gives you about $40,000 a year to safely withdraw from your investments,” Schiffert said.
That translates into about $3,333 per month, although taxes might reduce that amount, depending on your retirement accounts. Regardless, that amount alone may be enough for some retirees, such as those who have paid off their mortgage and car loans.
Retiring with $1 million is possible, according to Chad Gammon, CFP, owner of Custom Fit Financial. “I’ve seen people retire with even less than $1 million … They typically have very low living costs that are as low as $40,000 per year or lower. They might also work until age 65 or 70 to maximize their Social Security with benefits around $20,000 to $40,000 per year. They also typically do not have debt and enjoy the simple things in life,” Gammon said.
However, not everyone can live on $3,333 per month. While other sources of income like Social Security might help, if you’re trying to simply calculate what $1 million in retirement savings gets you, another option to consider is spending down your nest egg, rather than treading water with the 4% rule.
For example, if you wanted to pull out $5,000 per month from your retirement savings and the balance still earned 4% per year after taxes, that would last you approximately 27 years (not factoring in inflation). That could be enough for many, although some might end up outliving this time frame. Dropping the withdrawal slightly to, say, $4,500 per month would make your savings last longer.
“To make sure this works for you, you’ll also want to ensure your other sources of income such as Social Security, rental income and pensions combined with your investment withdrawals can support your lifestyle. And don’t forget to account for rising healthcare costs and inflation. If overlooked, these two major factors can significantly impact your financial security and retirement portfolio,” Schiffert said.
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What a Monthly Budget Might Look Like
Suppose you decide to draw down your retirement savings and took out $4,500 per month. That, combined with the average Social Security monthly benefit of nearly $2,000, would leave you with around $6,500 pretax. Post-tax amounts can vary significantly depending on your situation, but let’s assume for simplicity in this scenario your blended federal and state tax rate is 15%, leaving you with about $5,525 per month.
Using the 50/30/20 budget rule, that means 50%, or $2,762.50, could go toward your needs. That’s much more feasible if you don’t have monthly rent or a mortgage.
Then, 30%, or $1,657.50, could go toward your wants, such as eating out and travel. Depending on your lifestyle, that “wants” bucket could go quickly, but if you roll some over from month to month, it could be enough to take some significant trips in retirement.
Lastly, 20%, or $1,105, could go toward savings. Since you’re already pulling from retirement savings in the first place, this probably isn’t going to be a long-term savings bucket. Instead, you might think of it as more of an unexpected expense category, like a doctor’s bill that exceeds your needs budget or an unplanned home repair.
How Far Does $1 Million Go?
As you can see, $1 million doesn’t necessarily go all that far in retirement, but it’s possible to still set yourself up for success, especially if you can supplement with other income sources, like Social Security, and plan your budget carefully.
“My top tip would be to delay Social Security as long as possible. Once you are past your full retirement age and wait one year, it is like getting an 8% raise. An example would be delaying from age 67 to 68. I ask clients how often they received a 8% raise at work and it is not common, and it resonates to wait,” Gammon said.
And if you’re not sure where your retirement savings stand or how to plan effectively, meeting with a financial advisor can help. “It can also be a good idea to get low-cost financial help from hourly for flat fee advisors that can help create a dynamic withdrawal strategy to adjust on a yearly basis. You would spend less in a down market, and take out more after a good market year. The only thing I would note is that you have to be able to adjust your budget and that can be difficult for people,” Gammon said.
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This article originally appeared on GOBankingRates.com: What $1 Million in Retirement Savings Looks Like in Monthly Spending
