How Long Will $3 Million Last in Retirement?

How long $3 million will last in retirement depends on your spending habits and investment returns. While your spending habits are largely under your control, some costs such as healthcare expenses are not perfectly predictable. Likewise, while you can probably expect investment returns to be much like they have been in the past, there is no guarantee that future performance will match historical returns. Still, a $3 million nest egg will be adequate to fund a comfortable and secure retirement in the majority of circumstances. If you need help developing a plan for retirement, consider talking to a financial advisor.

Estimating the Life of $3 Million in Retirement Savings

Spending levels and investment returns are the two factors determining how long your retirement savings will last. Here are three scenarios using different approaches to spending and investing that illustrate the way the relationship works.

The Conservative Approach

A 65-year-old retired couple with $3 million might plan to withdraw 3% of their total portfolio for living expenses in their first year of retirement and then adjust their withdrawals in subsequent years for inflation. The safe withdrawal rate is often pegged at 4%, so a 3% withdrawal rate provides an extra margin of safety. This couple also conservatively estimates a 6% annual return on their investment. That too is at the low end of the historical range for a diversified investment portfolio.

A 3% withdrawal rate on $3 million comes to $90,000 in the first year. When adjusted for inflation afterward, that amount can fund a comfortable if not lavish retirement lifestyle in most communities. At a 6% return, their conservatively invested $3 million portfolio will generate $180,000 annually if all goes according to plan. This conservative spending and investing approach makes it likely the couple’s retirement nest egg will last indefinitely.

The Middle-of-the-Road Approach

Another 65-year-old couple with moderate spending plans and a middle-of-the-road risk tolerance expects to withdraw 4% of their capital each year for living expenses. They’ll invest more heavily in equities, which tend to be more volatile than fixed-income securities but over time usually generate higher returns. The couple projects 8% annual gains on their investments.

This approach will give them $140,000 per year to spend, and $240,000 in investment income. Like the first couple, they’ll never run out of money in most scenarios.

The Aggressive Approach

A more free-spending couple, also 65 years old, plans to withdraw 12% or $360,000 of their capital each year. To help them generate adequate income, they’ll invest more aggressively in hopes of earning 10% per year, equal to $300,000.

In this scenario, the couple’s expenses outpace their investment earnings. As a result, they will empty their retirement fund in about 16 years. To make their savings last for about 25 years, they would need to earn a consistent 12% with their investments, which is well above the long-term averages.

Extending the Life of Your Retirement Savings

In order to extend the life of retirement savings, retirees can spend less or earn more. Of these two options, spending is the one that’s more easily controllable. Many retirees follow strategies such as downsizing, moving to an area with a lower cost of living and traveling during the less expensive off-season.

It’s still possible for people to experience unexpected costs that can cause expenses to exceed their budget, however. For example, healthcare is one spending category where large bills can arrive without warning.

The other approach is to invest more aggressively to earn more. This can be done by means of asset allocation, putting a larger percentage of the portfolio into higher-earning assets, especially stocks, instead of safe assets such as bank certificates of deposit that may not even keep up with inflation.

Higher earnings from more aggressively invested portfolios are not guaranteed and carry more risk. However, for several decades stock-heavy portfolios have out-gained bond-heavy investment allocations.

You can also extend your retirement fund’s life by tapping other sources of income. For instance, these scenarios do not reflect Social Security benefits. Most people are eligible for these payments, which can let you maintain your standard of living without drawing down your retirement fund as quickly. You may also have income from a pension, an annuity or opt to work part-time in retirement.

Consider Living in Tax-Friendly States

One of the most effective ways to stretch a $3 million nest egg is to have residency in the most tax-friendly states. For example, Alaska, Florida, Nevada, South Dakota, Tennessee, Texas, Washington and Wyoming don’t tax wages, salaries, dividends, interest or any sort of income.

In addition, pensions are not taxed in Alabama, Hawaii, Iowa, New Hampshire or Pennsylvania. Further, Illinois and Mississippi do not tax Social Security, IRAs or 401(k)s.

Bottom Line

A $3 million portfolio will likely be enough to allow a retired couple to spend reasonably and invest with moderate caution without any worries of running out of money. However, if expenses rise too high, it’s entirely possible to drain a $3 million portfolio in well under 30 years.

Retirement Planning Tips

To help you develop a plan for funding a secure and comfortable retirement, consider talking to a financial advisor. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have free introductory calls with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Location can be as important in retirement as it is in real estate. When you’re deciding where you want to retire, SmartAsset’s cost of living calculator can help you compare locations. Enter your current location, the city you are considering for relocation, your household income and a few other details. You’ll learn how much higher or lower the cost in the new location will be, as well as how much you’ll need to earn to maintain your lifestyle there.