Here’s How Long $1 Million Will Last in Retirement

For years, $1 million was the benchmark — the ideal amount saved for retirement. However, given the number of variables involved in retirement expenses, it’s impossible to determine an exact amount that fits every retiree.

If you’re aiming for $1 million in a retirement account and wonder how long it will last you, you may not like the answer. That’s because it depends.

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Retiring in your mid-60s

If you were born in 1960 or later, your full retirement age (FRA) is 67. Whether you work until then or slip out a little early, financial planners assume a retirement horizon of 25 to 35 years. Whether the money will last that long or not depends on several factors, including how much you plan to withdraw annually, the average rate of return, and whether inflation holds steady or heads for the stratosphere.

This table illustrates how a single factor can alter how long $1 million lasts.

Data source: Author’s calculations (assuming a marginal tax bracket of 24%).

As the table indicates, how long $1 million lasts in retirement depends on factors you can control, such as how much you plan to withdraw annually and how much you’ll increase your withdrawals by each year. It also depends on factors you can’t control, like the average rate of return.

Making it last

Assuming dividends are reinvested, the average rate of return for the S&P 500 (SNPINDEX: ^GSPC) over the last 150 years is 9.434%. Adjusted for inflation, the average rate of return is 6.981%, or just shy of 7%. What’s remarkable is that this average accounts for both periods of U.S. prosperity and deep financial depressions.

And that’s the point: As a retiree, you have no control over what’s happening with the overall economy. You’re sure to live through both busts and booms, so you need a plan for both. Booms are great because you can withdraw the amount you want from your retirement account without worrying about how the withdrawal will impact your balance.

However, you want a plan for periods when the market seems on life support. It’s during that time when the value of your portfolio is at a low that you don’t want to sell, which means you don’t want to make any withdrawals. That’s because you’ll need to sell more assets to net the money you’re counting on for living expenses.

Your best bet is to create an easy-to-access cash account. That way, while the market is toughing it out, you have a source to draw funds from — just long enough to protect your retirement account. When it comes to interest-bearing accounts, you have plenty of options, including high-yield savings accounts (HYSAs), money market deposit accounts (MMDAs), short-term certificates of deposit (CDs), and short-term Treasuries (T-bills).

No matter how much anyone tells you that you must save for retirement, $1 million is quite an accomplishment. Properly managed, it can last a lifetime.

Dana George has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.