Can you retire with $1 million? Here’s how far it will go

Becoming a millionaire seems like a surefire way to live comfortably in retirement, but is it really?

More than a third of millionaires say it will take a miracle for them to have a secure retirement. That’s according to the Natixis 2021 Global Survey of Individual Investors, which surveyed 1,617 people who had accumulated at least $1 million in investable assets.

Rising inflation and an unstable stock market have made even those with deep pockets worried about the future. However, some financial experts say not to worry. “It’s about having an income plan rather than an asset plan,” according to Michael Foguth, president and founder of Foguth Financial Group in Brighton, Michigan.

Those with pensions, Social Security and annuities may find they are able to cover their expenses with this income, and saving becomes just the icing on the cake.

Factors such as housing and health care will also affect your budget and determine if $1 million is the right savings goal for your needs. Keep reading to learn more about how to answer the question: can you retire with a million dollars?

The lifetime of a million dollars in retirement depends on the following factors:

Geography: Costs can vary widely across the country, and where you live could determine whether you can successfully retire with $1 million. Financial website GOBankingRates analyzed average spending across 50 US states to see how long $1 million would last in retirement. He revealed that Hawaii retirees would exhaust $1 million in just under 11 years, while the cash would last more than 25 years in Mississippi.

Longevity: Although no one knows for sure how long they will live, people can make an educated guess based on their medical condition and family history. Those who could live well into their 80s, 90s and beyond may find that a million dollars isn’t enough.

Way of life: Retirees need to make smart spending choices, and those choosing expensive lifestyles will need more money in their nest egg. “How much you spend is a huge factor,” says Tyler Ozanne, certified financial planner at Probity Advisors in Dallas. Although retirees have little say in some of the factors listed here, discretionary spending is entirely within their control.

Health care: Fidelity’s 2022 healthcare cost estimate for retirees found that an average 65-year-old couple retiring this year can expect to spend $315,000 on healthcare costs in retirement. “The hope is that Medicare will be there and will be enough for people,” says Barbara Taibi, tax partner at Eisner Advisory Group in Iselin, New Jersey. But the reality is that even Medicare comes with out-of-pocket costs that can add up. Healthy seniors may have lower expenses and find that it helps their retirement savings last longer.

Long-term care: Fidelity’s estimate does not include long-term care, which could cost more than $100,000 a year for a private nursing home room, according to the 2021 Genworth Cost of Care Survey. Medicare won’t pay for long-term care, and a couple without long-term care insurance may find that a stay in a nursing home leaves a surviving spouse with few assets to pay for the rest of their retirement.

Retirement income: Most people will not live exclusively on their retirement savings. Those with average spending — which was around $52,000 for people aged 65 and over in 2021, according to government data — might not need a lot of savings to top up Social Security and retirement income, according to Ozanne. Even those who do not receive a pension may be able to replicate these payments by purchasing an annuity.

Asset Allocation: How you save that million dollars could also impact how long it lasts. “You can’t have $1 million in cash and expect it to pay you back (until retirement),” according to Taibi. Ideally, it will be invested in such a way as to follow inflation. Likewise, she says having $1 million invested is different from having $800,000 in home equity and $200,000 in a portfolio. Money held in real estate is not liquid, and there are costs associated with real estate that can offset its value.

Investment risk: Retirees should also take a close look at their portfolio if they want to know how long $1 million will last in retirement. “It all depends on how you’ve invested it,” says Foguth. Investing aggressively exposes the money to losses, but being too conservative can mean savings don’t grow enough to offset inflation and withdrawals.

Inflation: After years of near-zero inflation, the prices of many products have soared this year. This is something retirees should be prepared for. A rising rate of inflation will erode the purchasing power of money and cause retirees to deplete their savings faster.

All of these factors make it difficult to create a universal rule of thumb for retirement savings. While some people will be able to live comfortably in retirement on less than $1 million, others will need much more.

Of all the factors above, inflation is perhaps the number one concern for many people today. Over the past year, prices have risen at a rate not seen in 40 years, which may mean retirement savings aren’t going as far as they otherwise would.

“Retirees may need to withdraw more from their retirement accounts just to pay for living expenses,” Taibi says, “and those planning to retire in the next few years may need more to live on, and therefore have less surplus to set aside for retirement.”

However, for younger workers, the news is better. “What we are experiencing now is not sustainable in the long term,” says Foguth.

Over the course of a career, years of high inflation like 2022 are offset by years of low inflation – like 2015, when average annual inflation was close to zero. “The average inflation rate over a long period is 3% to 3.5%,” according to Ozanne. As long as workers have factored that level of inflation into their savings goal, they should be well positioned for retirement, given the rising cost of living.

Rather than relying on a rule of thumb to determine how much to save for retirement, financial planners advocate a more nuanced approach. “I think you need to have a more personalized number,” Taibi says.

This means taking the following steps to determine how much to save for retirement:

Retirees should make sure they include smaller items like gifts, vacations and home decor in their calculations. These things can quickly add up, and all expenses should be factored in to calculate an accurate retirement savings goal.

The amount people plan to withdraw from retirement funds each year should also be considered when setting retirement savings goals. A general rule is to withdraw 4% of retirement funds each year. Four percent of $1 million provides $40,000 each year for retirement expenses. If you can’t imagine living on $40,000 a year plus Social Security, it’s time to reconsider your savings goal.

“In a year characterized by high inflation and a falling stock market, retirees and those close to retirement may have to make some tough choices: work a little longer, get back to work, spend a little less and postponing some big items,” says Taibi.

If all of this seems overwhelming and confusing, find a financial professional who specializes in retirement planning. They have both the experience and the software to perform calculations on behalf of clients.

Although a million dollars may seem like a lot of money, the compounding earnings of investments mean that this figure is within reach even of those with relatively modest incomes.

“For young people, it’s quite simple: just do it,” advises Foguth.

Young workers with relatively few expenses should make saving for retirement a priority before life events like marriage, children or home ownership eat away at their extra money. Some employees may also have the option of a professionally managed 401(k) account. Although there are no guarantees, a properly managed account could result in better returns balanced with an appropriate level of investment risk.

A 25-year-old would need to save about $400 per month to reach a balance of $1 million by age 65, assuming a 7% annualized return on the investment. While it may seem like a lot, workers with a 401(k) can receive automatic contributions to their retirement plan from their employer. Many companies also match employee contributions. Both can quickly add to retirement savings.

But even compound gains have their limits. “It’s probably not as feasible if they waited until they were 50 to start saving,” says Ozanne. “My advice for someone who hasn’t started sooner is to temper their expectations.”

Other strategies to boost savings include lowering taxes, cutting expenses, and finding low-cost investment options. However you reach your goal, with careful planning and expert guidance, you may be able to stretch your million dollars or more through a decades-long retirement.