If you have $1.5 million retirement provision, you’ll be more than five times better off than the average retiree, who has just $279,997. It’s true that $1.5 million can last you indefinitely in retirement if you don’t spend a dime, or it can last you a day if you buy a new yacht. How quickly you spend your money has a big impact on how long it lasts, but also where you keep it. It can disappear quickly through risky investments, but if you keep it “safely” in cash, you actively lose against inflation. Working with a financial advisor may be able to help you maximize your savings and extend the life of your money in retirement.
Determine how much you have
You may think you have $1.5 million left over for retirement, but a closer look at your assets and income streams might make you realize you have more. By taking a thorough inventory, you can determine not only how long $1.5 million will last, but also how much you can reasonably spend each year.
retirement assets
In addition to your $1.5 million, you may have other assets that you can use at a later date to supplement your income or that will be included in your estate for your heirs. Other assets that should be considered in your calculation may include:
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Real estate assets that can be used to generate rental income, sold at a later date, or gifted to heirs, such as vacation homes or investment properties.
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Recreational equipment that can be sold or rented, such as boats, RVs, trailers, and ATVs.
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The equity you have built up in your home as you consider downsizing or moving to a less expensive area to reduce costs.
Retirement income
In addition to the income from your retirement account, you likely have other sources of income that reduce the amount you need to withdraw to maintain your lifestyle. Other types of income you could have in retirement include:
Calculate how much you can expect to spend regularly each month and subtract that amount from the amount you determined in the Monthly Expenses section below. For irregular income or annual income such as royalties or inheritances, you can choose to amortize them based on what you expect to receive or to ignore them altogether in your planning.
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How to determine how much you need each month
Most financial advisors agree that the average retiree will need to replace 80% of their pre-retirement income in retirement. This 80% is likely to be variable. Some years you might have to pay for weddings or trips, some years you might stay at home.
Research from the University of Michigan’s Retirement and Disability Research Center found that retirement spending is declining over time at all socioeconomic levels. While you can expect to spend more on health care in your later years, you won’t spend nearly as much as you did in your early retirement years on cruises, travel, dining and entertainment.
If you’re new to retirement, you can plan to spend 80% of your income each month, but don’t panic too much if you end up spending more in some years, especially in the beginning. You’ve spent your whole life saving for these years, and now it’s time to enjoy them while you still can.
Use a budget tracking tool like Mint, Personal Capital, or You Need a Budget to plan and track your spending. Schedule a quarterly check-in with your spouse to make sure you’re spending where it matters most to you. Schedule an annual check-in or speak to your financial advisor more frequently to make sure you’re still on track.
Investing for retirement
It can be tempting to put all your savings in cash when you’re near or in retirement. After all, cash doesn’t lose money, right? Incorrect. Holding your money in cash is the only investment where you actively lose money due to inflation.
If you retire at age 62, you can reasonably expect to live to age 82 if you’re a man, or nearly 85 if you’re a woman, according to data from the Social Security Administration. This means your $1.5 million portfolio must last at least 20 years, but it can also grow. Time is every investor’s friend.
Here’s how quickly you would run out of money with each portfolio type, assuming you have a $1.5 million portfolio and withdraw $60,000 annually, leaving 3.8% more for inflation each year deduct, which corresponds to the historical average annual inflation rate since 1960.
Cash portfolio
If you withdraw $60,000 annually from a $1.5 million portfolio held in cash, you would run out of money in 18 years. While $1.5 million divided by $60,000 is 25 years, the rate of inflation means you would have to gradually withdraw more each year to have the same purchasing power and run out of money faster.
Bond portfolio
It’s reasonable to expect a $1.5 million portfolio made up entirely of bonds designed to keep pace with inflation to last 25 years. While you’ll need to gradually take more out of your portfolio to achieve the same purchasing power, your portfolio should keep up with or even exceed the rate of inflation.
Stock portfolio
The average annual return of the stock market, as measured by the S&P 500, has historically been around 10%. If we take advantage of this return and still withdraw $60,000 per year, increasing our annual withdrawal rate by 3.8% for inflation, a $1.5 million portfolio could last indefinitely.
But average annual returns don’t tell the whole picture. Some years are in decline, others are in upward trend. While the stock market as a whole performs well over time, you could lose everything when picking individual stocks. Diversifying into an index fund that allows you to own tiny portions of the entire stock market can help reduce risk, but it doesn’t make stocks a safe investment.
If you lose a significant portion of your portfolio, panic and sell your investments, you have suffered a loss. If the stock market crashes right at the start of your retirement and expenses increase with larger withdrawals, your portfolio may never recover. Only you know your risk tolerance. Working with a financial advisor can help you find the right way to invest your portfolio for long-term stability.
The conclusion
How long $1.5 million lasts in retirement depends primarily on how quickly you spend money. If you have a stable and reasonable withdrawal rate and keep your portfolio invested in a safe and intelligent way, your money could last indefinitely. If you withdraw too much, especially in the beginning, invest it in volatile assets, or leave it in your bank account, you will likely run out of money before you have time to spend it.
Tips for retirement planning
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Working with a financial advisor can make all the difference in ensuring you’re on track for how much money you’ll need in your golden years. Advisors can help you create a retirement plan and even manage your assets for you. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three vetted financial advisors working in your region, and you can survey the right advisors for free to decide which one is right for you. When you are ready to find an advisor who can help you achieve your financial goalsGet started now.
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Taxes are another retirement consideration that should not be taken lightly. You may want to plan your residence based on certain tax benefits. Here are the best states to retire in because of taxes.
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