4 Retirement Planning Solutions To Make Your $1 Million Last (2024)

Congratulations! Your retirement planning has paid off. You've saved $1 million. Now you're wondering how long $1 million will last in retirement.

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How about four different strategies for using your $1 million for 30 years in retirement? In fact, two of the four aim to preserve your $1 million for the entire 30 years.

To calculate how long your $1 million will last in retirement, you've got to do some retirement planning. The starting point: decide how much you need each year.

Let's say your annual income right before retirement will be $80,000. And you plan to follow the rule of thumb that says you can get by on 80% of that in retirement. So your target yearly income will be $64,000— 80% of $80,000.

Where can you get that $64,000?

Retirement Planning A Smarter Way

Here's the simplest scenario: Suppose your $1 million is sitting in a checking account earning 0% interest. Of course, that's a very bad tactic. But it's one that many people use because it is simple and handy. Just remember, if you follow that path you will deplete your $1 million before the end of the 16th year.

Here's a smarter retirement planning scenario: Let's say you follow the popular 4% rule.

The rule says that if you limit annual withdrawals from your nest egg to 4% — or some similar rate — your balance should survive 30 years.That way, your money is likely to outlast you in retirement, even if you're one of the many people whose life expectancy is getting longer.

You could mix dividend paying stock mutual funds with interest paying bond funds. If that portfolio's overall net annual investment return is 4%, mission accomplished.

Income By Selling Shares

If your portfolio does not generate a 4% yield, you could sell 4%— or $40,000— of the portfolio's value each year. If your portfolio grows by 4% or more each year after taxes, then your $1 million will never run out.

And to preserve your purchasing power, your rate of return must stay ahead of your withdrawals plus the rate of inflation.

Retirement Planning: Control Your Withdrawals

The retirement planning variable you can control most is your rate of withdrawal. Basically, you want tolimit your withdrawals to no more than your rate of investment return.

To do that, it helps to know your annual expenses.

Make a budget. Identifying how you spend moneymakes it easier to whittle down specific areas of spending that get out of hand.

Remember, you do not need to limit your annual spending to $40,000. That's because you'll be able to live on that $40,000 withdrawal from your retirement nest egg, plus your annual Social Security benefits, plus any additional income you enjoy.

Maybe you've got a non-retirement portfolio. Or maybe you've got a traditional pension.

Typical Social Security Benefits

Typical Social Security benefits for a 65-year-old who'll earn $80,000 this year and who plans to retire first thing in 2020 would be $1,901 per month, or $22,812 for all of 2020, according to the Social Security Administration's benefits quick-estimate calculator.

That would give you an annual income starting next year of $62,812: $40,000 from your nest egg, plus Social Security. That assumes no additional income.

So, you'd be short of the income you need by about $1,200.

Retirement Planning: How Much Other People Spend

To trim spending, it can help to look at how other people at retirement age— 65 years or older— spend their money.

In the table above, new Bureau of Labor Statistics figures show the biggest annual expenditures on average for people at retirement age— age 65 and older— were for housing, at 33.31% of total spending, then transportation at 14.29%, health care at 13.37% and food at 12.99%.

Typical Changes In Spending

You can expect some spending cuts to occur naturally. Once you retire, for example, your commuting costs will likely go down.

But beware of spending that trends upward.

Health care spending, for instance, can rise as retirees age and grow increasingly infirm, says Hope Manion, chief health care actuary for Fidelity Workplace Consulting, an arm of Fidelity Investments.

A 65-year old couple retiring in 2019 can expect to spend $285,001 inhealth care and medical expensesthroughout retirement, Fidelity says. For single retirees, thehealth care costestimate is $150,000 for womenand$135,000 for men.

• Plan ahead for health costs.A "great option" for saving for health care costs in retirement is by contributing to a tax-advantaged account like a Health Savings Account (HSA), says Begonya Klumb, head of Fidelity's HSA team. Your contributions are tax-deductible, your earnings grow tax-deferred and withdrawals for eligible health expenses are tax free. You can use an HSA as part of a high-deductible health insurance plan. (For dos and don'ts about HSAs, check this IBD report.)

Retirement Planning: To Preserve Your $1 Million

Where does all of this leave you and your retirement planning? If you want your $1 million in retirement savings to last for 30 years, here are two suggestions. The lower-risk, conservative approach is more likely to work as planned. But it allows you less income each year from your nest egg:

• Conservative approach:Jonathan Clarke, associate professor of finance at Georgia Tech's Scheller College of Business, said your"withdrawal rate should be equal to the 30-year Treasury Inflation Protected Security rate, which is currently about 0.56%. Inflation expectations are currently about 1.6%. This suggests that in nominal terms an investor could withdraw approximately 2.1% from their portfolio each year." Clarke labels this an "extreme," zero-risk approach.
• Moderate approach: Aim for a withdrawal rate about 1 percentage point less than the average annual return on your portfolio. If you expect to withdraw 4% a year, the rate of return on your portfolio must be 5% that year, saysDana Anspach, CEO of Sensible Money in Scottsdale, Ariz.

Anspach's approach is intended to offer about a 90% chance of fully preserving your $1 million through normal markets ups and downs. It may not succeed if there is an unexpectedly severe or prolonged market downturn.

If You're Willing To Draw Down Your $1 Million

If you're willing to merely draw down your $1 million balance over 30 years, naturally your withdrawals can be larger each year. And again, the conservative approach will let you withdraw less money each year:

• Conservative approach: "My rough guess is that a 3% withdrawal rate will give the account owner a 90% chance of the portfolio lasting 30 years," Clarke said.
• Moderate approach:Your annual withdrawal rate can be slightly higher than your expected rate of return, Anspach says. If you expect to earn 4% to 4.13%, you can withdraw 4.25%, she adds. That strategy should allow half, or $500,000 of your starting balance, to survive after 30 years, she says.

Retirement Planning What-If Scenarios

In the course of retirement planning, if you want to project how much money you can withdraw yearly over a specified period like 30 years, given different rates of return, use an online amortization calculator, suggests Kimberly Foss, president of Empyrion Wealth Management.

Use the mortgage loan setting. Interest plus principal shows what your income would be.

Please follow Paul Katzeff on Twitter at@IBD_PKatzefffor tips about personal finance and active mutual fund managers who outperform the market.

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