How Long Will a Million Last?

by Jeff C. Johnson

Piggy bank

An investor met with me to consider his upcoming retirement from the workforce. He was youthful (in his mid-50s) and had accumulated $1 million in his various accounts. When I asked him the “why retire now” question, he said, “Why not, I’m a millionaire!”

Eligible for Social Security, but not for a decade, he needed income from retirement and personal assets to equal $75,000–$80,000 a year to live without working. After planning for state and federal taxes, we estimated a need of $100,000 for living expenses and tax payments.

Income of $100,000 from a $1 million portfolio is a 10 percent withdrawal rate. That’s no problem if you are going to earn 10 percent or more on your investments! But when I asked for his idea of a reasonable return, he (with a little historical perspective from me) decided that 6 percent would be a good long-term rate of return. Then he asked the big question…

If I earn 6 percent and withdraw 10 percent of the original principal, how long might that money last?

Using the following chart from my book (download printable version), I helped him discover the answer. Assuming a 6 percent investment return and a 10 percent withdrawal rate, the money could last 16 years. Not bad, if you’re 70 years old. But not awesome if you’re hoping for an early retirement in your 50s AND you’re expecting to live a long life.

Average Rates of Return chart

With that reality in mind, we considered his options:

  1. Accept that he will run out of money eventually.
  2. Accept greater portfolio risk and unpredictability, and hope for a higher return over time.
  3. Determine that he could live on a lesser amount of income now and in the future.
  4. Work longer and accumulate more money with a shorter number of years to be retired.

For the preretiree trying to get a handle on the amount of savings required for retirement and the timing involved with leaving the workforce, this chart could be helpful and has proven valuable for many people. “How Long Will the Money Last” is the title of chapter 3 in my book, The Extreme Retirement Planning Workbook, available for the modest sum of $11.95.