A million dollars sounds like a lot of money. (And in one sense, it very much is.) But when you start running the numbers on what retirement actually costs over 20 or 30 years, that number gets a lot smaller a lot faster than most people expect.
The question isn’t really whether a million dollars is a good amount to have saved. It obviously is. The question is whether it’s enough. And the answer depends almost entirely on the circumstances of your specific situation.
The Simple Math
At its most basic level, the math looks like this. If you retire at 65 and need your savings to last 25 years, a million dollars gives you $40,000 per year before accounting for investment growth, inflation, or taxes. Add Social Security income on top of that and you’re looking at something in the range of $60,000 to $75,000 annually for most people, depending on your benefit amount and when you claimed.
Where You Live Changes Everything
Geography is one of the biggest variables in how far a million dollars stretches. Retiring in a major coastal metro where property taxes are high and the general cost of living is steep burns through savings pretty fast. On the other hand, retiring in a mid-sized city in the South or Midwest can stretch your dollars much further.
Studies and retirement cost calculators consistently show that the same retirement lifestyle can cost 30 to 50 percent more in a high-cost area than a lower-cost one. A million dollars that lasts 20 years in one city might last 30 in another. If you have any flexibility about where you retire, that flexibility is worth some real money.
Healthcare Will Take More Than You Think
You have to give some strategic thought to your expenses in retirement. Specifically, think about healthcare, as it’s the category in the budget that catches people off guard. Medicare helps, but it doesn’t cover everything. Things like premiums for supplemental insurance, out-of-pocket costs, prescription drugs, dental, and vision add up quickly. And those costs tend to increase as you age rather than staying flat.
Various estimates put the average total healthcare cost for a retired couple right around $330,000 over the course of their retirement. That’s almost exactly one-third of a million-dollar nest egg allocated to medical bills. Long-term care costs, if they come into play, can accelerate the drawdown even more dramatically. A year of assisted living or nursing home care in many parts of the country costs six figures, and Medicare doesn’t cover it in most circumstances.
The Tax Question Most People Ignore
If your entire nest egg is sitting in a traditional 401(k) or IRA, every dollar you withdraw is taxed as ordinary income. Depending on your total income in retirement, including Social Security, you could be handing over a large percentage of each withdrawal to federal and state taxes.
A million dollars in pre-tax accounts is not actually a million dollars. It’s a million dollars minus whatever your tax bill ends up being, which could easily amount to 15 to 25 percent or more, depending on your bracket and state.
As the team at Lighthouse Financial puts it, “We believe a person’s largest expense that they will pay during their retirement years is not our cost, or investment and insurance products expenses, but rather, it’s the IRS. If we can help lower the amount of taxes a person pays, they may be able to have a retirement lifestyle that normally they would not be able to have.”
This is important, because most people spend their planning energy focused on growing their balance rather than protecting it from taxes on the other side. If you can plan with taxes in mind, you’ll be way ahead of most people (and can potentially stretch $1 million much further).
The 4 Percent Rule and Its Limits
The 4 percent rule has been the standard guideline for retirement withdrawals for decades. The idea is that if you withdraw 4 percent of your portfolio in the first year of retirement and adjust that amount for inflation each subsequent year, your money should last roughly 30 years. On a million-dollar portfolio, that means withdrawing $40,000 in year one and adjusting upward from there.
The rule was developed using historical market data and it’s been a useful benchmark, but it has limitations. It doesn’t account for individual tax situations, sequence-of-returns risk in the early years of retirement, or periods of sustained high inflation. Some financial planners now suggest a more flexible approach in which withdrawal rates adjust based on market performance rather than remaining fixed regardless of conditions.
Making a Million Dollars Go Further
If a million dollars is what you have or what you’re on track to accumulate, the goal becomes making it last as long and work as hard as possible. That means being intentional about where you live, how you spend, and the places you choose to invest your nest egg.
The best thing you can do today is proactively meet with a financial advisor to see what your next steps are!
Feature image from Canva.
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