Becoming a millionaire seems like a surefire way to live comfortably. However, if you are no longer working, just how long will a million dollars last in retirement?
The financial technology company SmartAsset looked at average household expenses and found that, nationwide, a $1 million nest egg should last 23.46 years. That assumes a real return of interest on the savings minus inflation.
Since costs can differ dramatically throughout the country, the company then adjusted expenses based on the cost of living in 232 cities. The results showed retirees in New York City would deplete $1 million in 10.21 years, while the cash would last 32.26 years in McAllen, Texas.
The figure for McAllen is impressive, says Mark LoCastro, spokesperson for SmartAsset, but people shouldn’t assume the averages will be true for them. “You should be proactive about planning for retirement,” he explains.
That means understanding how factors such as housing and health care will impact your budget and whether $1 million is the right savings goal for your needs. Keep reading to learn more about how to answer the question: Can you retire on a million dollars?
Is $1 Million Enough to Retire? Factors to Consider
While everyone’s expenses will be different, there are some costs that can make it difficult for anyone to stretch $1 million over a long retirement.
“Where you live is one of the most important factors,” LoCastro says. A major difference between New York City and McAllen is the cost of housing. In McAllen, residents spend an average of $5,827 annually on housing. That expense is more than five times greater in New York City, where residents spend an average of $28,040 per year on housing, according to the Bureau of Labor Statistics. That comes out to 38% of the average New Yorker’s budget.
Housing costs can be particularly burdensome to retirees if they have an outstanding mortgage or home equity loan. “It’s really challenging to retire when you have to pay (that) down,” says Mike DiNuzzo, a certified financial planner and wealth advisor at DiNuzzo Wealth Management in Beaver, Pennsylvania.
While retirees have some control over their housing and debt costs, health care expenses may be more difficult to rein in. “Health care could add up to $285,000 or more for a married couple over the course of their retirement,” says Lynda Abend, chief data officer for John Hancock Retirement.
Determining the Right Amount for Retirement
The data from SmartAsset calculates how long it will take a retiree to deplete their savings. However, “We don’t expect any of our clients to spend their money to zero,” DiNuzzo says.
Instead, financial planners such as DiNuzzo recommend a strategy of taking out only as much as can be covered by investment gains for the year. He describes it as being akin to treading water. This way, retirees will keep enough money in reserves for any unexpected future expenses. Maintaining a healthy balance in a retirement fund also guards against running out of cash should someone have a lengthy retirement.
To break even, retirees are often advised to take out no more than 4% of their fund balance each year. This percentage is less than what the stock market traditionally gains, on average, in most years. “Of course, we don’t know what the future will hold,” DiNuzzo says.
Four percent of $1 million is $40,000. If that, along with any expected Social Security or pension payments, will let you maintain your current lifestyle, you probably don’t need to save more. However, remember that inflation means money in the future will buy less than it does today.
“Everyone’s retirement savings goals are different,” LoCastro says. “Some people want to relax, and some people want to travel.”
If you can’t imagine living off $40,000 a year plus Social Security, it’s time to reconsider your savings goal. Do that by calculating your expected expenses. The answer will help you determine how much you need to retire if $1 million isn’t enough.
“Once you know how much you’ll need to spend, you’ll know how much you need to save,” Abend says. A finance professional can help you estimate expenses and suggest appropriate savings vehicles.” We recommend having a formal plan that can help you set your financial goals and keep you on track.”
How to Get to $1 Million in Savings
While $1 million may seem like a lot of money, compounding gains from investments means this number is within reach even for those with relatively modest incomes. “For someone entering the workforce now, it’s absolutely achievable,” DiNuzzo says.
A 25-year-old would need to save approximately $400 a month to achieve a $1 million balance by age 65, assuming a 7% annualized return on the investment. While that may seem like a lot, workers with a 401(k) may receive automatic contributions to their retirement plan from their employer. Many companies also match employee contributions. Both can quickly add to retirement savings.
Young workers with relatively few expenses should make retirement savings a priority before life events such as marriage, children or homeownership chip away at their extra cash. “Shape your life in a way that you are going to live without that money,” DiNuzzo advises.
Some employees may also have the option of a professionally managed 401(k) account, Abend says. “A managed account generally can recommend a savings rate based on your goals, as well as a tailored investment mix that considers your outside accounts,” she explains. Although there are no guarantees, a properly managed account could result in better returns balanced with an appropriate level of investment risk.
Other strategies to boost savings include minimizing taxes, cutting expenses and looking for low-fee investment options. However you reach your goal, with careful planning and expert guidance, you should be able to stretch your $1 million across a retirement that is decades long.
More from U.S. News
Can You Retire on $1 Million? Here’s How Far It Will Go originally appeared on usnews.com