A growing number of retirement savers are seeing their account values rise to $1 million or more, according to data from Fidelity.
At the end of 2024’s second quarter, the number of 401(k)-created millionaires grew by 2.5% to 497,000. Millionaires created from individual retirement accounts increased by 6% to 398,594.
While that’s encouraging news, investors still face the question: How long will $1 million last in retirement?
That question has become even more important recently as inflation drives up the cost of living. Health care expenses, which typically rise as people age, have increased faster than the consumer price index, according to the Peterson-KFF Health System Tracker.
Having a good understanding of the effects of inflation, along with tracking your spending, is key to making your money last.
“I find that the best way to plan for what you’ll spend during the upcoming year isn’t to make an estimate but rather to look at what you actually spent during the previous year or two,” said Keith Spencer, a certified financial planner at Spencer Financial Planning in Spokane, Washington, in an email.
Spencer suggested reviewing bank statements and recording all withdrawals and payments, including credit cards.
“Once you have a total number, you can back out any unusual spending, such as a home renovation that isn’t reflective of your normal spending,” he said. “Then add an inflation adjustment for the upcoming year to reflect the reality that prices tend to rise over time.”
That process, he said, offers a good starting point to determine what next year’s spending may look like.
Here are some factors retirees and those nearing retirement should consider to help their savings last.
[READ: Your Guide to Retirement Planning.]
Evaluate Your Financial Situation
Burying your head in the sand and hoping for the best isn’t generally a good retirement plan. Instead, take an inventory of your financial assets and weigh them against your current and expected spending.
“Pre-retirees should begin by assessing their whole financial situation, including their 401(k) or IRA,” said Steven Kibbel, a certified financial planner at Kibbel Financial Planning in Nashville, Tennessee, in an email.
This assessment should include not only investments but also pensions, Social Security, real estate and other assets.
“Creating a timeline for utilizing each of these items is critical. You should also put your savings through a stress test against potential hazards like market volatility and rising health care bills,” Kibbel said.
“Having a diverse mix of income streams, and knowing when to draw from each, is just as crucial as saving money,” he added.
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Anticipate Your Living Expenses
Once you understand where your retirement funding is coming from, you can begin to figure out how to finance your golden years.
The amount of money retirees need often differs from what they expect. For example, it’s well known that health care costs typically rise as people age, but people frequently underestimate their actual lifestyle spending.
“Budget, budget, budget,” said Chris Mediate, president of Mediate Financial Services in Canfield, Ohio, in an email.
“You need to really get a handle on where your money is going,” he added. “I always have clients break down their budget into cost of living, which would be their needs, and then determine what they want.”
By deciding how much they need and want, retirees can determine how much they can withdraw from their $1 million in investments. This is where the combination of various income sources comes into play.
For example, it’s important to have a plan for withdrawals to manage taxes from various account types, such as taxable accounts or traditional and Roth IRAs. Mediate pointed out that if there’s a difference between income from sources like Social Security and pensions, retirees can ascertain the best withdrawal strategy.
“Without a true budget, you are just throwing darts at a board, which can end up being disastrous later in life,” he said.
Consider Where You’ll Live
One million dollars will go further in some parts of the U.S. than others. Not only are state taxes higher in some places, but so is the cost of housing.
That can impact retirees who want to sell a home and downsize; the cost of even smaller homes has risen sharply in some locales.
For example, it may be tough to use the proceeds of a home sale in one state to buy a home in another.
“Many of my clients live in high-tax states. That is a frequent topic of conversation,” said Adam Puff, president of Haddonfield Financial Planning in Haddonfield, New Jersey, in an email.
Puff said most of these clients plan to avoid those high-tax states in retirement.
“It is almost always a good idea and puts extra dollars into any retirement plan,” he said. “Even if you need to stay in the area for family reasons, it may be as simple as moving to another county or just over the border to a neighboring state if it’s close enough for the family involved.”
Those types of practical decisions, he said, could result in saving significantly more money during retirement.
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Invest to Maximize $1 Million
Smart retirement investing doesn’t mean swinging for the fences and trying to make as much money as possible. That would require taking a significant amount of investment risk, something that’s ill-advised for most retirees.
Instead, investing should focus on generating the return needed to fund a retiree’s or couple’s lifestyle and other expenses, such as health care, throughout their lives.
“Our retirement investment strategy entirely depends on how much income you’ll need to withdraw from the portfolio and how long you believe you’ll need the money to last,” said Chad Willardson, founder of Pacific Capital in Corona, California, in an email.
“You’ve got to balance liquidity and income yield to meet your cash flow needs,” he added.
Willardson suggested diversifying using low-cost index funds, dividend-paying stocks and real estate investment trusts to generate growth and income. “Regularly rebalance your portfolio and adjust your withdrawal rate based on market conditions to make sure your money lasts throughout retirement,” Willardson said. “Remember, it’s not just about maximizing returns, but also about managing risk and maintaining a sustainable income stream.”
He added that it’s prudent to keep things simple.
“Always consider a cash reserve for emergencies and unexpected short-term needs,” he said. “With only $1 million and a need for liquidity and income, I don’t recommend allocating to alternative investments like private equity or hedge funds.”
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How Long Will $1 Million Last Me in Retirement? originally appeared on usnews.com
Update 10/23/24: This story was published at an earlier date and has been updated with new information.
