How Long Will $2 Million Last in Retirement?
If you have enough money, you can retire comfortably and never look back. If you don’t, you may have to keep working to keep the lights on and the fridge full. On the other hand, this is a difficult question. How much money you need depends on health, lifestyle, location, longevity and many other issues both within and well outside your control. How long will 2 million dollars last? The short answer is, most likely it will be comfortable for the rest of your life. The long answer is, even without any growth this nest egg will last an average of 35 years. Consider working with a financial advisor to find out how long this will last with your specific situation.
What is your annual drawdown?
At its most basic, your retirement math accounts for – (drawdown x years of retirement). In other words, how much money is in your account? How much do you withdraw from the account each year? And how many years can you make these withdrawals before you run out of money? For a $2 million retirement account, we can start with the average.
At the time of writing, the median income in the United States was just under $71,000 according to the US Census. Most retirement advisors, meanwhile, recommend the 80% rule. This means you should plan on diverting approximately 80% of your pre-retirement income to your retirement account.
From those numbers, the average family should plan for approximately $56,800 per year in replacement income ($71,000 x 0.8). With a $2 million retirement account, you can coast on it for about 35 years ($2 million / $56,800).
What is your annual return?
But it’s not that simple (in a good way). You also need to plan for at least some rate of return.
Investors manage their retirement accounts differently over time. Over your working life, your retirement account will often contain a significant measure of equity funds and even, perhaps, some individual stocks. As you approach and enter retirement, most people shift this balance away from high risk/high reward assets into safer investments.
Either way, your portfolio will still earn some money over time. How much, though, depends on how you invest. If you put your entire portfolio in the S&P 500, you can expect an average increase of 10% per year over time, but with a big drop in off years. If you put your entire portfolio in bonds, you can expect average growth of 1.6% per year, but with much lower volatility.
A $2 million retirement account invested entirely in an S&P 500 index fund would generate an average return of $200,000 per year. That’s enough for most families to survive without dipping into the principal, but that account will take a significant hit in a few years. So you’ll need to feel comfortable withdrawing past ever so often to allow that account to regain its value after a loss.
If you invested entirely in bonds, your account would generate an additional $32,000 per year. It’s probably not enough to live on, but depending on your lifestyle and Social Security benefits, it could potentially help grow your retirement savings substantially.
what is your lifestyle?
How long your retirement account will last depends on how much you withdraw from it and depends largely on how and where you live.
For example, take someone who doesn’t need more than our average retirement income of $56,800. Say they collect an average Social Security benefit of $20,964 a year and all their money is invested in bonds, earning an average of $32,000 a year.
This alone would net them $51,000 in continuous income, money generated without ever touching their portfolio. They would only need to withdraw an additional $6,000 per year. At that rate, for all intents and purposes, the $2 million retirement fund will last indefinitely. Those numbers change for someone who needs more money and for someone who makes more or less than Social Security.
This is an important question for planning for retirement. Where do you want to live? How much does it cost to live there and what will be the impact on those costs over time? how do you want to live What kind of lifestyle do you want to enjoy and how will those costs change over time?
Calculate your retirement needs based on what kind of income you’ll need to meet those goals because how long a retirement account lasts depends on how much you withdraw from it. Let’s put that much.
social security issues
How much you collect from Social Security matters. Very.
In general, your individual benefit from Social Security depends on how much you earned during your working life and when you start collecting it. The program pays out benefits based on how much you paid in Social Security taxes, so wealthier families receive more and poorer families receive less. It also pays out more depending on the age at which you start taking benefits.
You receive full benefits if you start collecting Social Security at full retirement age, which is currently set at age 67. If you collect it early, you get lower benefits up to the minimum payment at age 62. The age of retirement, at present, has been fixed at 70 years.
The result is that Social Security benefits are highly case-specific. At the time of writing, they can range from a minimum of $45 per month to a maximum of $4,555 per month. This range matters. At the time of writing, the maximum Social Security benefit that can be paid is up to $54,660 per year. That in itself is nearly enough to fund the average retirement income, although a family that receives that much money will have a more expensive lifestyle and need more income.
Regardless, understand how much you’ll receive in Social Security. How long your retirement savings will be spread out will make a big difference.
A retirement account with $2 million should be enough to make most people comfortable. With an average income, you can expect it to last 35 years or more. However, everyone’s retirement expectations and needs are different. It is important to evaluate whether the money you have saved is enough to fund the lifestyle you want and for how long.
- How much you need to retire is a deeply personal question, so make sure you get equally personal advice. A financial advisor can help you with tax planning that can save you money and improve your situation. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can interview your advisor matches for free to decide which is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- When it comes to Social Security, there’s another wrinkle that people often don’t think about, the taxes.
Photo credits: © iStock.com/jacoblund, © iStock.com/LumiNola, © iStock.com/shapecharge
Eric Reid Eric Reid is a freelance journalist specializing in economics, policy and global issues with substantial coverage of finance and personal finance. He has contributed to outlets including The Street, CNBC, Glassdoor and Consumer Reports. Eric’s work focuses on the human impact of intangible issues, with an emphasis on analytical journalism that helps readers more fully understand their world and their money. He has reported from more than a dozen countries, including Sao Paulo, Brazil; Phnom Penh, Cambodia; and Athens, Greece. A former attorney, before becoming a journalist, Eric worked with a pro bono specialty in human trafficking issues in securities litigation and white-collar criminal defense. He graduated from the University of Michigan Law School and can be found on any given Saturday in the fall cheering on his Wolverines.