How Long Does $1 Million Last Once You Retire?

When it comes to retirement, many Americans are worried about one key question: How long will my retirement savings last? While some believe that $1 million is the magic number for retirement, it's important to understand how many years a retiree can realistically live on that $1 million. We'll break down some key factors that affect this -- and help you plan for a comfortable and sustainable retirement.

1. Your retirement lifestyle

One of the biggest factors affecting how long your $1 million will last in retirement is your retirement lifestyle. This includes everything from where you'll live and what activities you'll enjoy to how you'll budget for day-to-day expenses.

In general, if you plan to spend more in retirement, your $1 million won't last quite as long. On the other hand, if you're planning on living a frugal lifestyle, your savings will afford you more time.

2. Inflation

Inflation is another major factor that impacts how long your retirement savings will last. Over time, inflation erodes the purchasing power of the dollar -- meaning that the same amount of money will buy less as time goes on.

While many retirees are tempted to rely on cash for their retirement savings, this approach may leave them vulnerable to the risk of inflation. Experts recommend that retirees invest their retirement funds in tax-advantaged retirement accounts, like a 401(k) or IRA, to create a hedge against inflation.

3. Investment returns

Another factor that plays a major role in determining how long $1 million will last is your investment returns. The stock market can be unpredictable; therefore, retirees should position their portfolios by diversifying across different asset classes to balance risk and stability.

There may be years when your returns are lower than expected, or even negative. It is essential to adjust your investment portfolio ahead of retirement to ensure that it matches your risk tolerance and goals.

4. Healthcare spending

Retirees must budget for healthcare costs and expenses, as these are likely to increase as you age. Medicare can assist with certain costs of medical bills, but it is not a complete solution.

There are many additional costs to consider when it comes to healthcare expenses, including long-term care, prescription drugs, supplemental insurance, and more. A retiree should budget for these expenses well in advance and prepare for unexpected medical events.

5. Withdrawal rates

Withdrawal rates are the amount you withdraw from your investments each year once you reach retirement. In the early years of retirement, many financial experts advise withdrawing less than 4% of savings from your portfolio each year in order to make the retirement funds last. However, this may not work for everyone, as it will depend on your specific financial goals and lifestyle.

For example if you are in the 22% tax bracket and are taking $5,000 a month ($60,000 annually), then your $1 million retirement nest egg will last about 20 years if your annual return is 6% and you increase your withdrawal amount by 3% every year. If you increase the withdrawal rate to 6%, then your funds will last about 15 years.

Bottom line

With people living longer, $1 million for retirement will not last as long as it used to. How long it will last depends on these factors. When it comes to retirement, it's important to have realistic expectations and a well-planned budget.

The key takeaway is to understand the different factors to plan for as well as to start saving now, if you haven't already. The earlier you start investing, the more time you have to grow your retirement fund to reach the ultimate goal of financial independence in retirement.