One million dollars has long been considered a magic number for retirement. But can you really retire on $1 million? The quick and easy answer is, “Yes.” The more nuanced answer is, as always, “It depends.” If you’re a high earner or high-income couple approaching retirement, your lifestyle, tax strategy, healthcare costs, and long-term financial strategy will play a huge role in determining if $1 million is enough. 

Is $1 Million Enough for Retirement?

A $1 retirement portfolio is substantial, but whether it’s enough depends on how you plan to spend it. If you’re considering retirement at this major financial milestone, here’s what you should consider first – especially if you’re in a high-income household.

Key Factors That Determine How Long $1 Million Will Last in Retirement

How you spend it

There’s a heuristic known as the “Four Percent Rule.” I don’t necessarily subscribe to it, but since we’re not creating a personalized financial plan, it is good enough for now.

According to the Four Percent Rule, withdrawing 4% of your portfolio value in the first year of retirement and adjusting that figure for inflation would sustain a household’s investment portfolio’s value in retirement. In theory, you could draw $40,000 (not adjusting for inflation) from your $1 million retirement portfolio each year without running out of money.

Market Volatility

The Four Percent Rule works until it doesn’t. Protecting your portfolio from the first big market crash after retirement (especially if that crash occurs soon after your retirement date) is critical because a 20% decline in Year One hurts a lot more than it does after Year Five or Ten. This phenomenon is known as a “sequence of return” risk. 

Paying attention to the sequence of return risk and protecting and investing your assets appropriately could allow you to jump from a 4% withdrawal rate to a 6% rate or more (depending on investment returns, which will depend, in part, on your equity allocation) meaning you could afford to take $60,000 or even $80,000 of annual income from your investments.

Your Pre-Retirement Income

Your Social Security benefits and your standard of living are both key factors in whether your retirement savings will go the distance. Let’s say you and your spouse are receiving the maximum Social Security retirement benefit – about $100,000 per year in total. In that case, you were probably making at least $350,000 per year.

Why does it matter? If your standard of living requires $350,000, and your Social Security income is $100,000, you’ll be spending $250,000 each year to bridge the gap. In other words, your $1 million retirement will be gone in about 4 years.

Your Lifestyle and Spending Habits

Many advisors recommend you plan on spending roughly 80% of your pre-retirement income per year during retirement. But do you really plan to reduce your standard of living by 20% when you retire? Probably not. Instead, take stock of everything you expect to spend in retirement, from housing and health care to luxury travel, and go from there.

Cost of Living in Retirement

Whether you can retire on $1 million has a lot to do with where you live. Your annual expenses will be higher if you retire in the New York metro area than if you retired in the Berkshires, for example.

No matter where you settle, you should also consider whether you’ll be living in a large home or small condo and whether your monthly budget needs to include a mortgage or rent payment.

Health care expenses

We typically retire at a later age which, inconveniently, is when medical costs tend to increase. Fidelity Investments’ 23rd annual Retiree Health Care Cost Estimate revealed that a 65-year-old retiring today can expect to spend an average of $165,000 in healthcare costs and medical expenses throughout retirement. As a couple, you could easily spend 33% of your $1 million portfolio on health care alone!

Longevity

I probably don’t need to tell you this, but the longer you’re retired, the farther your retirement savings need to stretch. At 67, the Social Security Administration figures that the average American has somewhere between 15 and 19 years remaining, but for some, retirement may last 30 years.

Taxes

Did you know that for most people, 85% of Social Security income is taxable at ordinary income rates? That, combined with taxes due on withdrawals from your retirement portfolio can erode your ability to retire on $1 million in a way that many people don’t expect.

How to Make $1 Million Last in Retirement

Even if $1 million isn’t enough by itself, strategic planning can help you maximize your retirement savings. Here are some ways to stretch your wealth:

Maximize Social Security 

The full retirement age for Social Security is 67, but delaying until age 70 increases your monthly benefits significantly. (Conversely, if you claim at 62, you receive permanently reduced benefits.) However, the best way to get the most out of Social Security is different for everyone, so it’s worth taking a closer look at your options.

Optimize Tax Efficiency

When it comes to your retirement income, proper withdrawal planning can save retirees tens of thousands of dollars each year (this is probably not the case if you’re only withdrawing $40,000). Tax planning can also help minimize the impact of excess withdrawals that are common in the first years of retirement as you’re busy checking items off your bucket list. With a little forethought, you can keep more of your money.

Reduce Health Care Expenses

Choosing the right Medicare coverage is one of the simplest ways to save money in retirement, but it’s easier said than done. I strongly advise working with an experienced professional when selecting Medicare plans. They don’t necessarily have to be a financial advisor but should be someone who consults and implements filing for you. A free service is the SHINE (Serving the Health Insurance Needs of Everyone Program).

Protect Against Market Downturns

I do not endorse the common practice of new retirees to shift from what may have been considered a “growth” portfolio to a long-term “conservative” portfolio. For many people, there are still decades of investing/living to be had after retirement, which gives time to invest for growth. However, just as a good offense can be the best defense in sports and business, a good defense (volatility control) can be the best offense (increasing income) for a new retiree.

Assigning some hedges that allow for appreciation, like so-called “buffer funds” or selling out of suitable long-term investments with short-term risks, can be a good way to control how much income you can withdraw during a market crash. Then, after the crash, you can use that opportunity to realign the portfolio’s allocation to be more growth oriented.

The Verdict: Can You Retire on $1 Million?

For some retirees, $1 million may be enough, but for high-income earners accustomed to a certain lifestyle, it might fall short. If you’re going to retire on $1 million, the key is careful planning and strategic withdrawals so you can protect your hard-earned wealth from excessive taxes and market volatility and get the most from your investments, Social Security benefits, and Medicare options.

If you’re unsure whether $1 million is enough for your specific situation, working with a financial advisor who specializes in retirement planning can help you assess your needs, align your portfolio with your goals, and avoid running out of money in retirement. 

Want to retire on $1 million? We’ll help you make it last.

Create a retirement plan designed to generate a predictable retirement income month after month from your savings, investments, and other income streams so you can focus on what matters.