How Much Retirement Will $3 Million Buy Me? (2024)
Mark Henricks
·5 min read
How long $3 million will last in retirement depends on your spending habits and investment returns. While your spending habits are largely under your control, some costs such as healthcare expenses are not perfectly predictable. Likewise, while you can probably expect investment returns to be much like they have been in the past, there is no guarantee that future performance will match historical returns. Still, a $3 million nest egg will be adequate to fund a comfortable and secure retirement in the majority of circ*mstances. If you need help developing a plan for retirement, consider talking to afinancial advisor.
Estimating the Life of $3 Million in Retirement Savings
Spending levels and investment returns are the two factors determining how long your retirement savings will last. Here are three scenarios using different approaches to spending and investing that illustrate the way the relationship works.
The Conservative Approach
A 65-year-old retired couple with $3 million might plan to withdraw 3% of their total portfolio for living expenses in their first year of retirement and then adjust their withdrawals insubsequent years for inflation. The safe withdrawal rate is often pegged at 4%, so a 3% withdrawal rate provides an extra margin of safety. This couple also conservatively estimates a 6% annual return on their investment. That too is at the low end of the historical range for a diversified investment portfolio.
A 3% withdrawal rate on $3 million comes to $90,000 in the first year. When adjusted for inflation afterward, that amount can fund a comfortable if not lavish retirement lifestyle in most communities. At a 6% return, their conservatively invested $3 million portfolio will generate $180,000 annually if all goes according to plan. This conservative spending and investing approach makes it likely the couple's retirement nest egg will last indefinitely.
The Middle-of-the-Road Approach
Another 65-year-old couple with moderate spending plans and a middle-of-the-road risk tolerance expects to withdraw 4% of their capital each year for living expenses. They'll invest more heavily in equities, which tend to be more volatile than fixed-income securities but over time usually generate higher returns. The couple projects 8% annual gains on their investments.
This approach will give them $140,000 per year to spend, and $240,000 in investment income. Like the first couple, they'll never run out of money in most scenarios.
The Aggressive Approach
A more free-spending couple, also 65 years old, plans to withdraw 12% or $360,000 of their capital each year. To help them generate adequate income, they'll invest more aggressively in hopes of earning 10% per year, equal to $300,000.
In this scenario, the couple's expenses outpace their investment earnings. As a result, they will empty their retirement fund in about 16 years. To make their savings last for about 25 years, they would need to earn a consistent 12% with their investments, which is well above the long-term averages.
Extending the Life of Your Retirement Savings
In order to extend the life of retirement savings, retirees can spend less or earn more. Of these two options, spending is the one that's more easily controllable. Many retirees follow strategies such as downsizing, moving to an area with a lower cost of living and traveling during the less expensive off-season.
It's still possible for people to experience unexpected costs that can cause expenses to exceed their budget, however. For example, healthcare is one spending category where large bills can arrive without warning.
The other approach is to invest more aggressively to earn more. This can be done by means of asset allocation, putting a larger percentage of the portfolio into higher-earning assets, especially stocks, instead of safe assets such as bank certificates of deposit that may not even keep up with inflation.
Higher earnings from more aggressively invested portfolios are not guaranteed and carry more risk. However, for several decades stock-heavy portfolios have out-gained bond-heavy investment allocations.
You can also extend your retirement fund's life by tapping other sources of income. For instance, these scenarios do not reflect Social Security benefits. Most people are eligible for these payments, which can let you maintain your standard of living without drawing down your retirement fund as quickly. You may also have income from a pension, an annuity or opt to work part-time in retirement.
Bottom Line
A $3 million portfolio will likely be enough to allow a retired couple to spend reasonably and invest with moderate caution without any worries of running out of money. However, if expenses rise too high, it's entirely possible to drain a $3 million portfolio in well under 30 years.
To help you develop a plan for funding a secure and comfortable retirement, consider talking to a financial advisor. Finding a financial advisor doesn't have to be hard. SmartAsset's free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you're ready to find an advisor who can help you achieve your financial goals, get started now.
Location can be as important in retirement as it is in real estate. When you're deciding where you want to retire, SmartAsset's cost of living calculator can help you compare locations. Enter your current location, the city you are considering for relocation, your household income and a few other details. You'll learn how much higher or lower the cost in the new location will be, as well as how much you'll need to earn to maintain your lifestyle there.
“For example, if you retire with $3 million saved, you would start withdrawing $120,000 in the first year and adjust this amount for inflation thereafter,” he said. To stretch your money further, Kayikchyan said you can consider withdrawing less than $120,000 annually.
So if you have managed to save three times this, you should be hugely proud of your efforts. If, for instance, we look at 3 million dollars in a vacuum and ignore how it could grow via interest and investment, we can see that $3 million across 40 years equates to a generous $6,250 per month.
According to a 2020 working paper from the Center for Retirement Research at Boston College, the top 1% of retirees-which a retiree with $4 million in assets would fall into-can expect to pay about 22.7% in state and federal taxes.
And while that may seem like a lot of money, high-net-worth individuals — those with more than $1 million in investable assets — believe they will need more than double that to retire comfortably, with the average person in this pool estimating they will need $3 million.
For example, you can calculate an $80,000 return for your $2 million retirement fund. As a result, your income at 55 will be $6,666 per month. Then, you'll increase this amount by 3% this year to combat inflation. Plus, you'll start collecting Social Security at 65 and estimate a $2,500 monthly benefit.
Living off the interest of $3 million is possible when you diversify your portfolio and pick the right investments. Here are six common investments and expected income for each year: Savings and money market accounts. Savings accounts are one of the most liquid places to hold your money besides a checking account.
According to the MacroMonitor, by 2022-23, the number of U.S. households with $3 million or more in financial assets represents 3.2% of all households, totaling 4.6 million.
Key findings. In 2022, the average (median) retirement savings for American households was $87,000. Median retirement savings for Americans younger than 35 was $18,800 as of 2022.
How many multimillionaires with more than $3 million are there in the United States? There are roughly 8,047,570 households with $3 million or more in America, 6.13% of all US households.
Being rich currently means having a net worth of about $2.2 million. However, this number fluctuates over time, and you can measure wealth according to your financial priorities. As a result, healthy financial habits, like spending less than you make, are critical to becoming wealthy, no matter your definition.
The wealth of U.S. households by income tier. There is a wide gulf between the wealth of lower- and upper-income U.S. households. In 2021, the typical upper-income household had a median net worth of $803,400. This was 33 times as much as the wealth of the typical lower-income household ($24,500).
Yes, retiring early with $3 million is possible. If you plan to retire at 55, you will have to account for 11 additional years of expenses and 11 fewer years of income compared to retiring at 66. However, with careful planning, $3 million can provide a comfortable retirement starting at 55.
Get a Part-Time Job or Side Hustle. If you're contemplating retirement with no savings, then you may need to find ways to make more money. Getting a part-time job or starting a side hustle are two ways to earn money in your spare time without being locked into a full-time position.
Once you have $1 million in assets, you can look seriously at living entirely off the returns of a portfolio. After all, the S&P 500 alone averages 10% returns per year. Setting aside taxes and down-year investment portfolio management, a $1 million index fund could provide $100,000 annually.
Consider a 5% reduction in spending from pre-retirement levels, accounting for taxes and Social Security benefits. For a $3 million retirement fund, anticipate a monthly income of $6,250 over 40 years, barring investment growth or loss.
And, while life expectancy can be estimated, no one knows for certain how long they will live. As a result, they can only approximate how long their nest egg will need to last. Retiring at age 45 with $3 million is quite feasible if you already have the money and your post-retirement income needs are not excessive.
Depending on your goals and plans, $3 million can be enough to cover early retirement at 40. However, certain factors will affect whether $3 million is enough. For example, your retirement needs and life expectancy play a big role. Here's how to invest it to cover healthcare, housing and lifestyle.
The 95th percentile, with a net worth of $3.2 million, is considered wealthy, facilitating estate planning and possibly owning multiple homes. The top 1%, or the 99th percentile, has a net worth of $16.7 million and represents the very wealthy, who enjoy considerable financial freedom and luxury.
Introduction: My name is Dr. Pierre Goyette, I am a enchanting, powerful, jolly, rich, graceful, colorful, zany person who loves writing and wants to share my knowledge and understanding with you.
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