Budgeting for retirement can be more challenging than budgeting for life with a job. You start with a number you think will do the trick and hope that unforeseen circumstances don’t drain your savings too early. Similarly, you might not want to pinch pennies and cut corners out of anxiety when it’s not financially necessary. This article will take a look at how long a $4 million nest egg will last in retirement under a variety of factors and circumstances. If you’d like personalized advice for your specific situation, consider speaking to a financial advisor.
At What Age Do You Want to Retire?
The age at which you plan to retire has a big impact on how long your money will last. If you want to retire at 55 rather than 70, that’s 15 more years of expenses your savings will have to cover. Additionally, retirement programs such as Social Security and Medicare won’t kick in until you’re in your 60s, so early retirement also means you’ll likely be covering more expenses out of pocket in the first years of retirement.
The other number to consider here is how long you expect to live so that you can understand how much you need to retire. You can also take a look at your family’s medical history as well as your own to add more nuance to that estimate.
Once you’ve decided on when to retire and determined a reasonable expectation of your lifespan, you’ll know how long you’ll need your $4 million to last.
What Are Your Basic Expenses?
Next, it’s time to take a look at your living expenses. If you’re planning to live the same lifestyle you live now, more or less, in retirement, then this will be relatively simple. If you’re planning to make major changes to your lifestyle when you retire, whether cutting back or splurging more, make sure to factor that in. Here are some common retirement expenses to consider:
- Living expenses: Total up what you expect to spend on housing, utilities, food and transportation. For example, housing expenses might include mortgage payments, property taxes, HOA fees or maintenance expenses. Transportation might include car payments, gas money or the cost of insurance.
- Medical expenses: Even if you sign up for Medicare, you’ll need to cover the premiums, so make sure you set money aside for those as well as medications and treatments.
- Taxes: How much will depend on your investments and income strategy, but you will likely still be paying taxes in retirement. According to a 2020 working paper from the Center for Retirement Research at Boston College, the top 1% of retirees—which a retiree with $4 million in assets would fall into—can expect to pay about 22.7% in state and federal taxes.
- Debt payments: If you have debt outside of your house or car payment, you’ll want to add it to your monthly costs.
- Fun money expenses: How you expect to spend your time in retirement can also add to your total bill. Factor travel plans, hobbies and entertainment costs into your budget.
- Emergency fund: Set aside some money for surprise expenses. Whether it’s a hospital trip or a totaled car, it’s wise to have some cushion built into your budget for unexpected costs.
These expenses play a big part in how long your retirement lasts. You might notice pretty quickly that you’ll need to make some lifestyle changes even with $4 million in the bank, especially if you plan to retire early or were hoping to keep up a certain lifestyle in retirement.
Strategies for Making $4 Million Last
Now that you have an idea of how long your retirement needs to last and what your annual expenses will be, let’s look at some ways to make sure your savings last. Here are some common tips and strategies:
- The 4% rule: The 4% rule says that you can withdraw 4% of your total retirement savings each year, adjusted for inflation and your savings on average will last at least 30 years. Like any basic rule of thumb, this one comes with plenty of qualifications and exceptions, but it can be a useful place to start. Now, 4% of $4 million is $160,000, so as long as you expect your retirement to last for about 30 years and that amount sounds like enough—or more than enough—for you, you’re in a good place.
- Set income versus spending money: Using this strategy, you would use the guaranteed income to cover “needs” and investment income to cover your “wants.” You’ll want to set up enough guaranteed income streams to support your basic expenses — this might be Social Security payments, pension benefits, bonds or annuities. Then you’ll use your other investments to cover your discretionary spending. This method allows you to rest easy knowing your necessities are covered and when returns are good you can enjoy a healthy discretionary income. On the other hand, when the markets are down, you might need to do without traveling and other perks.
- Bucket strategy: This strategy separates your retirement into “buckets” based on age or retirement stage. You’ll have one bucket for short-term expenses, which should be filled with low-risk assets like CDs, bonds and savings accounts. You’ll have another bucket for middle-term expenses with medium-risk, inflation-protected investments — such as preferred stocks, utility stocks, convertible bonds and REITs. Finally, you’ll have your long-term bucket with the riskiest investments—generally a portfolio with a diverse blend of sticks and other assets. This method should allow you to hold onto investments during down markets while still having safe investments to fall back on.
- Annuities: An annuity is a financial product that pays you a set amount over a set time period. Annuities can be a great way to bulk up your guaranteed income. A fixed annuity will pay you back the principal you put into it according to an agreed-upon schedule, plus any interest you earned.
- Long-term care insurance: It can be a smart idea to purchase a long-term care policy to cover in-home care, nursing home expenses and assisted living facilities. These costs are usually not covered by Medicare and can quickly deplete retirement savings.
- Take Social Security later: Deferring your Social Security will result in higher payments. A single person born in 1985 making $100,000 a year would receive $49,710 in annual Social Security payments if they retired at 65. If they pushed their retirement back five years to age 70, they would receive $71,124 in Social Security benefits each year. Use a Social Security benefit calculator to see how this would impact your situation.
What a $4 Million Retirement Might Look Like
Let’s use the above example of a single person born in 1985. Say they retire at age 70 with $4 million. Using the 4% rule, they would be able to withdraw roughly $160,000 a year from their investments. On top of that, they would receive $71,124 in Social Security benefits each year. That’s an annual income of $231,124—and it should last them the rest of their life.
The Bottom Line
Retirement planning can be scary and there are a lot of what-ifs and unknowns. But with some wise planning, you can rest assured that $4 million will last you the rest of your life. You may want to work with a financial advisor to see how much you’ll need and when the right time to retire is for you.
Retirement Planning Tips
- Creating a detailed plan for retirement income often involves working with an expert. A financial advisor can provide impartial insights on how to invest your portfolio to meet your retirement income need. 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 interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- There are numerous strategies that retirees use to create retirement income. To provide the most flexibility, it helps to build a larger nest egg. Our investment calculator allows investors to forecast how big their nest egg will grow with information such as starting balance, annual contributions, annual returns and timeframe.
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