Can You Retire on One Million Dollars?
For starters, $1,000,000 is a lot of money, and if you’ve accumulated that in your investment accounts, good job. There’s no question that it takes consistency and discipline. Twenty years ago, though, $1,000,000 was a whole lot of money. Today, it’s great, but maybe not enough alone unless you are super frugal and have low expenses or have steady alternate streams of income. In twenty more years, it will be significantly less than it is today and much harder to live on. That’s because a dollar today will purchase less when you retire because of inflation, meaning that the cost of the things you buy and the services you use will rise by some degree over the long haul. Is $1 million enough?
Arriving at $1 Million
The good news is that it takes a small amount over a long period of time to amass $1 million ($200/mo, growing at an average of 8% per year from age 22 to 67). Two hundred dollars a month is a low watermark intended to give you confidence that reaching this goal is possible, even for those with smaller incomes. This harkens back to the article I wrote in May 2024 about Teens Becoming Millionaires. The key is starting early! And if you didn’t start as early as 22, that’s OK because you still have time. More on that at the end.
What does $1 million look like?
When taking a conservative approach to withdrawing from your nest egg, we use a rate of 4% per year. That rate of withdrawal mitigates losses in bad markets and leaves some growth behind to keep compounding in years when the market does well. Withdrawing 4% of $1 million per year translates to $40,000 of yearly income. Will that be enough for you to live and enjoy life after you stop working? A core service we provide is determining a withdrawal strategy that provides the income you need to fund your living expenses and retirement fun.
It Depends
Several factors influence the degree to which $40k per year will be doable.
Living within your means. This means you control your expenses. The best way I know how to do this is by living on a zero-based budget. This is a superpower.
Where do you live? Location, location, location. The cost of living varies greatly depending on where you live. A smaller home in another state could allow your money to carry you further.
Rid yourself of debt. Get rid of all high-interest and consumer debt (credit card debt, personal loans, student loans, car loans) ASAP. If you have no debt payments, you have more of your million dollars to fund life and living.
Avoid taking on more debt. It can be tempting to do this for large expenses, like vacations, roof replacements, kitchen remodels, and vehicle purchases. Avoid future debt by setting money aside for emergencies and those big-ticket items well in advance.
Work towards paying off your house. Your housing is your largest and most constant expense. If you don’t have this payment when you retire, you rid yourself of the largest item in your monthly expenses. If you reach retirement in that state, you’ve freed up a ton of wiggle room in your $40k.
The Reality
It’s not as if the last five points aren’t critical, but it’s likely that $40k per year will still not be enough, so what can you do to position yourself better? Additional streams of income and supercharging your savings will get you there.
Cross the Streams
Remember the famous line from the movie The Ghost Busters, “Don’t Cross the Streams”? Retirement income is the opposite. More streams of income working together will give your retirement a favorable outcome.
What will you get in Social Security?
Social Security is often the first alternate income stream considered. We have a great article here if you want to learn more about how Social Security benefits work. And if you want to nerd out on a benefit calculation example, Mike wrote an article a few years back. For context, the average retired worker's Social Security benefit in 2024 is around $1,900 per month. Adding that to your $40k nest egg withdrawal makes a meaningful impact.
Pre-retirees and clients who are already retired often ask, ”Will my Social Security benefits still be there when I start collecting, or will my benefit be cut at some point?” I personally believe nothing will change for those already in retirement and likely not for those who are close to retirement, but in reality, we don’t know. What if you had enough other income that it didn’t matter what happened with Social Security?
Keep Diversifying
Other income streams include passive business ownership, government pensions, rental real estate, and continuing to work. Part-time work is a great way to supplement your income. Maybe it’s your fun money. We have several clients over the age of 65 who have part-time and even full-time work. Some do it out of necessity, and some do it because it’s the pursuit that keeps them active. Work is an avenue to keep contributing and stay connected, so include it in your possibilities. We have a terrible habit of minimizing the value of work or putting in people’s minds that the goal is to stop working. As an added benefit, if you have income from work, you can delay consuming the $1 million pot you amassed, stretching it further, giving you greater spending flexibility, paying for unexpectedly large expenses, or having more fun.
Another avenue of income is rental real estate. There is a big hassle factor here. Even though we hear it called passive income, managing a rental is a lot of work when you consider tenants and maintenance. Done right, rental real estate can be a significant alternate income stream in addition to being an asset that goes up in value and can be sold.
These are just a couple of ideas meant to illustrate ways to generate income beyond the $40k from your $1 million savings. But there’s one more thing I want to propose.
Supercharge Your Savings
The factors I mentioned earlier that influence your ability to retire on $1 million have the additional benefit of freeing up more money, allowing you to save WAY more than $200 per month. If you save 15% of your gross income, the compound growth and resultant yearly income may blow your mind.
If you make $50k, here’s what that could look like
$50,000 * 15% = $7,500 per year saved
$7,500 per year, growing at an average of 8% per year from age 22 to 67 = $3.3 million
Withdrawing 4% of $3.3 million per year translates to $160,000 of yearly income
If you make $100k, here’s what that could look like
$100,000 * 15% = $15,000 per year saved
$15,000 per year, growing at an average of 8% per year from age 22 to 67 = $6.6 million
Withdrawing 4% of $6.6 million per year translates to $264,000 of yearly income
It’s absolutely realistic to have more than $1 million saved at age 67, and the increase in available annual income is substantial. So, what if you didn’t start as early as age 22? Getting your financial house in order as soon as possible still makes a huge difference. Let’s say you start at age 40. If you make $100k, here’s what that could look like.
$100,000 * 15% = $15,000 per year saved
$15,000 per year, growing at an average of 8% per year from age 40 to 67 = $1.4 million
Withdrawing 4% of $1.4 million per year translates to $56,000 of yearly income
That’s a considerably better position than you would be in otherwise and underscores how time is of the essence.
If you want a partner who can come alongside you, understand your personal and financial situation, and offer you a plan that works for your retirement goals, contact us today. Our team of financial advisors has the tools and creativity to help you find your path to retirement.
