Is a Million Dollars Enough to Retire? #272
It’s one of the most frequently asked questions by my clients as they prepare for retirement. And while a million dollars may sound like a lot, the reality is a bit more complex.
There are several key factors to consider when planning your retirement, including factoring in taxes, evaluating withdrawal strategies, and understanding the cost of living where you plan to retire.
Let’s break down how you can determine whether your nest egg will support your ideal retirement.
You will want to hear this episode if you are interested in...
[01:57] Evaluating if a million dollars is enough to retire.
[02:47] Tax Considerations on Retirement Withdrawals.
[05:04] Importance of Social Security as a retirement income supplement.
[06:12] putting together some type of a monthly budget as far as what you are spending money on now and what you plan to spend money on in retirement.
[08:37] Risk tolerance’s influence on expected returns and sustainable withdrawal rates.
[10:51] Risks of exceeding safe withdrawal rates (running out of money early).
How Much Can You Live On?
How much can you safely withdraw each year without depleting your funds too quickly? In this episode, I’m discussing a dynamic withdrawal strategy, which suggests you can withdraw 3% to 5% of your portfolio annually.
Here’s a practical example:
4% withdrawal from $1,000,000 = $40,000 per year.
But it’s crucial to remember: most retirement savings are held in pre-tax accounts such as IRAs and 401(k)s. Distributions from these accounts are taxed as ordinary income. This means the real, spendable income you receive after taxes could be significantly lower.
For example, factoring in roughly 15% in combined federal and state taxes, that $40,000 could shrink to about $34,000 per year.
Factoring In Social Security and Pension Income
Thankfully, your retirement income isn’t limited to withdrawals from your investment accounts. For most, Social Security provides a critical supplement—let’s say an average benefit of around $30,000 per year.
Some retirees might also have pension income, though this is becoming less common.
So, your total annual income might look like:
$34,000 (after-tax retirement withdrawal)
+ $30,000 (Social Security)
= $64,000 (before factoring in pension or additional income streams)
Your personal retirement number isn’t “one size fits all”—it depends greatly on what you need to spend in retirement and your other income sources.
Know Your Expenses
Stop fixating on round numbers like “one million or two million dollars” as retirement goals. The real question is: What are your anticipated expenses in retirement? Start by creating a detailed budget of your expected housing, health, food, utilities, travel, and leisure costs.
Once you know your likely annual expense, you can better estimate how much you’ll need to cover from savings versus other sources. If your post-tax retirement income falls short of your living expenses, you may need to adjust your plan by saving more, reducing spending, or considering a later retirement date.
How far your savings go will also depend on your investment strategy. A well-balanced portfolio with an appropriate mix of stocks, bonds, and cash is essential. Being too conservative can hurt your portfolio’s growth potential.
You also need to account for inflation. By following a thoughtful, tailored approach, you can make the most of your retirement—whether your nest egg is one million dollars or not.
Resources Mentioned
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