How Long Will $1 Million Last?
Is $1 million enough to live on? For that matter, how can one know that any amount is "enough"? The answer may surprise you.
There are several factors that can determine how long – or how short – $1 million (or any amount for that matter) will actually last. Some studies conclude it’s around 20 years, on average. The real answer? It depends. If not managed properly, a golden nest egg can become a short-lived payday. Despite how long it took you to mass this much, $1 million can disappear very quickly.
When determining how much a client needs to retire, our team at Linscomb & Williams looks at several factors.
We go over these factors in more detail below, but we've also put together this informative video on the subject:
Your Spending Habits
As you probably guessed, your spending habits are one of the most important inputs to estimating your probability of financial success. If you can keep your spending under control, your nest egg will last longer. Obviously, the more you spend, the more you’ll need. Further, when you take this money from your retirement plan, the more it costs. The more withdrawals you make, the more you’ll use, going through your precious nest egg very quickly. When you withdraw from your retirement accounts, not only are you depleting your reserves from the direct withdrawals themselves, but you are also diminishing the ability to accumulate more investment earnings by selling off some of your capital.
Certain spending is necessary. The biggest expenses for retirees are housing, transportation, and healthcare. For most families, it is not the necessities of spending that create a problem; more often, it is the discretionary decisions about spending.
In a recent meeting of our Wealth Management Committee, we took an informal poll among our team of Wealth Advisors and asked what type of spending represented the greatest challenge to families in the sense of threatening sustainability of their retirement capital. The answer was interesting as the team reflected upon our 50 years of helping families through retirement: The #1 spending challenge was the temptation to deplete capital to assist adult children and grandchildren. Retirees can get in trouble, often not by over-spending on themselves, but by being overly generous to their family.
The moral: If you can maximize your efficiency for these important facets of your finances, your nest egg can go a long way.
Your Income Level
A high income can boost your ability to save and invest. But remember, more income can mean more taxes.
As your income increases over time, be sure to put more effort toward your tax management. There are some great tools at your disposal to increase your tax efficiency, such as retirement accounts, planning for maximizing the benefit of charitable donations, legacy planning, and paying attention to the various other write-offs the IRS provides. A tax-efficient strategy can save you tens of thousands of dollars over time, allowing you to build a bigger nest egg while you work and preserving your nest egg longer. A relationship with a fiduciary financial advisor, knowledgeable about such issues, can greatly aid your financial plan over the long-run.
Location, location, location. Like real estate, the value of your $1 million can be greatly affected by where you live. The cost of living you experience in the area where you live and ultimately retire influences your spending, tax picture and your overall savings. A high-cost address can take a serious bite out of your financial longevity.
For example, a salary of $50,000 in Atlanta, Georgia, could decrease to $45,407 in Houston, Texas. Cost of living in Houston is lower, allowing more to be saved. These considerations are more important now that employers are increasingly more open to remote work arrangements. Locations such as California or New York can make an even bigger difference, with higher costs for housing alone. These costs, especially in retirement, will have a major impact on how long $1 million can last. Think wisely about the long-term financial ramifications of where you choose to live, especially during retirement.
The Length of Your Retirement
The general consensus is that the sooner you can retire, the better. That may be true, but this is not necessarily the case for your finances. A longer retirement requires careful financial management, and potentially, a larger nest egg.
The average lifespan for men and women combined in the U.S. is 78 years. If you stop working at age 62, you might be thinking, "I'm good if my money can last 16 years." Our financial planning team often wrestles with some of these actuarial realities in preparing analysis for retirement sustainability. Two mis-calculations in thinking the planning timeframe is 16 years for a 62-year-old retiree: First, the average lifespan of 78 years applies to a newborn baby in the U.S. By age 62, some percentage of that newborn population has died off, meaning the average lifespan for men and women combined at age 62 is longer – actually about 83.5. And second, if the actuaries are right on an average age 83.5, then about 50 percent of people will live longer than that. You may want better than 50/50 odds of your capital sustaining itself, so that means you’ll need the means to support yourself for something more than two decades in retirement, possibly closer to three.
So, while your spending in retirement is very important, the actual length of your retirement is the other side of your spending coin. There are financial planning strategies that can help stretch your money, such as waiting to receive Social Security benefits until later, if you can, or even working a part-time job you enjoy during retirement to give yourself an additional financial cushion. Members of our team have discussed this in other blog posts.
Your Plans for Your Golden Years
Likely, the most enjoyable part of planning your retirement is deciding how you will spend it. Will you spend quality time with family and friends, simply enjoying the opportunity to live life without work? Or will you travel the world, checking off destinations as you circle the globe? Although your Golden Years are meant to be enjoyed, this time period can burn through your savings if you’re not careful. Discuss your plans with a financial advisor so your savings adequately reflects the spending associated with your lifestyle goals.
Depending on your lifestyle, the amount of money you will spend can be higher or lower than the average. If you have plans that are more expensive, talk to your financial advisor about where you can possibly cut back. This can give your Golden Years a foundation of financial peace of mind, and prolong how long this type of lifestyle can actually last.
Your Financial Goals
No matter what financial trends are occurring or what demographic statistics say, remember that your personal financial situation is unique and specific. A million dollars can seem like a lot or a little, depending on your financial goals. One thing we've learned in working with hundreds of families over 50 years is that this planning is not one-size-fits-all!
Are you looking to donate more to charity? Pay for your grandchildren’s higher education? Is your goal to leave a sizable legacy to your family? Each of your goals has important implications for how your funds should be saved and invested, as well as their tax consequences.
How Long You Have to Save
The more time you have before you retire or reach a particular goal, the more opportunities you have to save and invest. With more time, every dollar saved and invested can compound and grow.
Shorter time horizons limit the amount of time you can save, and may force you to invest more conservatively. Together, these two factors can put a ceiling on your growth. Since time is a major factor in your financial life, an evergreen financial strategy is to start early when you can.
Your Financial Advisor
As you can see, there are a number of considerations to keep in mind when considering your financial longevity. The more money you have, the more you can lose. This can make working with a financial advisor even more important for your financial goals. A financial advisor can take an in-depth look at your goals, needs, financial habits and more to create a plan that maximizes your financial health and ultimately prolongs your asset base.
Your spending, investment choices, and retirement and tax planning can have major effects on your nest egg. Having the right relationship with your financial advisor can make that $1 million of yours last a very, very long time.
If you’re currently looking for a financial advisor in the Atlanta area to help you with your wealth management needs, contact Linscomb & Williams to see how we can help. Linscomb & Williams has offices in Texas; Atlanta, GA; and Birmingham, AL, and serves clients nationwide. Don’t put your retirement planning off. Get the conversation started today.