Many people dream of retiring with a few million dollars in savings. But how long will $4 million actually last in retirement? The answer depends on a variety of factors including your retirement lifestyle, rate of return on investments, inflation, healthcare costs, and more. This article will provide a comprehensive analysis on how long $4 million can be expected to last throughout retirement.
How Much Annual Income Can $4 Million Generate?
The first step is determining how much annual income $4 million can generate. Assuming a conservative 4% withdrawal rate, $4 million would provide $160,000 in annual retirement income. The 4% rule is a popular guideline for sustainable withdrawals in retirement. By limiting withdrawals to 4% of your total nest egg in the first year of retirement, and adjusting for inflation in subsequent years, the theory is that your portfolio should last for the duration of your retirement.
Here is a quick table summarizing the potential annual retirement income at different withdrawal rates:
| Withdrawal Rate | Annual Retirement Income from $4 Million |
|---|---|
| 4% | $160,000 |
| 5% | $200,000 |
| 6% | $240,000 |
More aggressive withdrawal rates like 5-6% may provide more annual income initially, but also increase the risk of depleting the portfolio. The 4% withdrawal rate provides a more conservative estimate for sustainable annual retirement income.
Factors That Impact How Long $4 Million Will Last
Several variables impact how long $4 million can last in retirement:
Retirement Lifestyle Expenses
The amount you spend annually in retirement directly impacts how long $4 million will last. Those with more lavish retirement lifestyles will burn through a $4 million nest egg quicker. According to surveys, here are average annual spending figures for retirees:
– $55,000 for a modest retirement lifestyle
– $100,000 for an average retirement lifestyle
– $160,000+ for an affluent retirement lifestyle
The higher your annual expenses, the quicker you will deplete a $4 million portfolio at a 4% withdrawal rate. Prioritizing needs over discretionary wants and implementing a budget can help extend the longevity of $4 million in savings.
Rate of Return on Investments
The annual rate of return earned on investments also greatly impacts how long $4 million can last. Earning higher returns from a prudent investment strategy allows you to withdraw more income annually while still preserving portfolio longevity.
If you maintain an average 5% return during retirement, $4 million would last 41 years with a 4% withdrawal rate. But if you earn just 3% annual returns, $4 million would only last 33 years with 4% withdrawals. Higher investment returns enable greater income with less risk of outliving savings.
Impact of Inflation
Inflation must be accounted for to prevent loss of purchasing power over time. Assuming a moderate 2% annual inflation rate, the purchasing power of money declines significantly over 20-30 years in retirement.
Ideally, retirees should receive cost-of-living adjustments on their withdrawals to keep pace with inflation. This is why the 4% rule allows for increasing the withdrawal amount annually based on the prior year’s inflation. Failing to adjust for inflation increases the risk of depleting the portfolio.
Rising Healthcare Costs
Healthcare is one of the biggest expenses for retirees and costs are rising substantially faster than overall inflation. Fidelity Investments estimates the average retired couple age 65 will need $315,000 to cover medical expenses in retirement. Rising healthcare costs will consume a larger share of withdrawals over time, reducing how far $4 million can go.
Sequence of Investment Returns
Experiencing poor market returns in the early years of retirement increases risk of a $4 million portfolio being depleted prematurely. Having a worse-case scenario plan and implementing asset protection strategies can help mitigate sequence risk. Retirees may also consider delaying Social Security benefits to accrue delayed retirement credits and provide more income during market downturns.
Taxes
Taxes are another expense that can directly reduce retirement income. $4 million in pre-tax savings will generate more income than $4 million in a tax-deferred IRA or 401(k), since contributions and growth haven’t been taxed yet. Withdrawing large amounts from tax-deferred accounts can push retirees into higher tax brackets. A tax-efficient withdrawal strategy is crucial to making $4 million last.
How Long Will $4 Million Last Based on Expenses?
We can determine how long $4 million may last based on the range of typical retirement expenses:
Modest Retirement Lifestyle – $55,000 Annual Spending
With $55,000 in annual withdrawals, plus a 2% annual increase for inflation, $4 million would last 41 years with a 4% initial withdrawal rate. This assumes a 5% average annual return on investments. By maintaining a modest budget in retirement focused on needs, $4 million can easily provide income for the duration of most retirements.
Average Retirement Lifestyle – $100,000 Annual Spending
Withdrawing $100,000 annually, adjusted for 2% inflation each year, would deplete a $4 million portfolio in 33 years at a 4% withdrawal rate and 5% return. This still covers most retirement periods. But higher healthcare costs later in retirement could jeopardize portfolio longevity.
Affluent Retirement Lifestyle – $160,000+ Annual Spending
A withdrawal rate of 4% from a $4 million portfolio equates to first-year spending of $160,000. At this level of spending, $4 million would be depleted in 31 years based on the same assumptions. With lavish lifestyles, some austerity measures may be needed to extend the longevity of $4 million in savings.
Here is a table summarizing portfolio longevity based on different initial withdrawal rates and investment returns, assuming 2% annual inflation:
| Initial Withdrawal Rate | Average Annual Return | Years Until $4 Million is Depleted |
|---|---|---|
| 4% | 5% | 41 |
| 5% | 5% | 33 |
| 4% | 4% | 36 |
| 4% | 6% | 51 |
Higher initial withdrawals and lower returns reduce longevity, while lower withdrawals and higher returns extend how long $4 million can last.
How to Make $4 Million Last in Retirement
Here are some tips to help make $4 million last throughout your entire retirement:
Implement a Budget
Tracking expenses and setting a reasonable annual budget is crucial for controlling spending in retirement. Build in a buffer for unexpected costs and aim to maintain flexibility in your budget.
Be Tax Efficient
Keep taxes low by withdrawing first from taxable accounts, then tax-deferred accounts. Only withdraw required minimum distributions from tax-deferred accounts. Harvest losses to offset capital gains. And consider relocating to a tax-friendly state.
Invest Appropriately
Maintain a diversified portfolio focused on preserving principal through less volatile assets, while still achieving portfolio growth through prudent equity exposure after retirement.
Include Annuities
Allocating a portion of the portfolio to guaranteed income annuities can provide peace of mind by covering essential expenses regardless of market conditions.
Delay Social Security
Delaying Social Security until age 70 provides guaranteed income that rises 8% annually beyond full retirement age. This also reduces the burden on your portfolio.
Consider Long-Term Care
Mitigate the costs of long-term care by purchasing LTC insurance or consider hybrid policies that combine life insurance and LTC benefits.
Earn Extra Income
Pursuing side hustles and generating additional income during the early retirement years can help ease withdrawals from your portfolio. Even earning $20,000 per year makes a big difference.
Conclusion
A $4 million retirement portfolio can provide sustainable income through nearly any retirement lifespan if withdrawals are maintained around 4% initially and then adjusted for inflation. Those with more modest lifestyles may be able to withdraw less and extend the longevity of savings even further. The key factors that impact how long $4 million will last include your annual budget, tax strategy, healthcare costs, investment returns, and more. With proper planning, investing, and budgeting, $4 million can easily provide 30+ years of comfortable retirement income for most diligent retirees.