I Have A $1 Million Nest Egg For Retirement – How Much Can I Safely Spend Each Year To Avoid Running Out Of Money?

Congratulations on reaching the coveted $1 million retirement savings milestone! You’re among an elite group of savers. 

According to data from the Employee Benefit Research Institute (EBRI), only about 3.2% of Americans have $1 million or more in their retirement accounts.

Now that you’ve achieved this impressive goal, the crucial question is: How much can you spend each year without depleting your savings?

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The 4% Rule

Traditionally, financial planners have recommended the 4% rule. This rule suggests withdrawing 4% of your initial balance in the first year of retirement and adjusting that amount for inflation in subsequent years.

For a $1 million portfolio, this would mean:

• First-year withdrawal: $40,000
• Assuming 2% annual inflation, second-year withdrawal: $40,800

However, given current economic conditions, some experts now consider this rule outdated.

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Conservative 3.3% Approach

A 2021 study by Morningstar suggested a more conservative 3.3% initial withdrawal rate for those hoping to sustain their portfolio for 30 years. 

For a $1 million portfolio, this would mean:

• First-year withdrawal: $33,000
• With a 2% inflation rate, the second-year withdrawal would be approximately $33,660.

However, as of 2023, Morningstar has revised its recommendation. Their latest research suggests that retirees can safely withdraw 4.0% of their portfolio with a 90% chance of still having funds after 30 years. This update is primarily due to stronger bond yields and lower projected inflation than earlier estimates.

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Retirees can start with this slightly higher rate without risking their long-term financial security in a balanced portfolio with 20% to 40% in equities and the rest in bonds and cash.

Morningstar notes that more flexible withdrawal strategies – such as adjusting based on portfolio performance – could even allow for higher withdrawal rates (up to 5.2%) under certain conditions. But these come with trade-offs, including potentially smaller ending balances after 30 years.

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The Debate: 3.3% vs. 4.0%

Some financial experts, like Suze Orman, still advocate for more conservative withdrawal rates. Orman recommends that retirees err on the side of caution, as unexpected life events, market downturns, or personal emergencies can strain savings. For those who prioritize financial security over risk, sticking to a 3.3% rate may provide more peace of mind, especially if they have a lower risk tolerance or prefer to leave a legacy behind.

Spending For A 20-Year Retirement

Your expected retirement duration significantly impacts how much you can safely withdraw. Research from Western Carolina University suggests that for a 20-year retirement, initial withdrawal rates between 5.8% and 6.3% may be appropriate for moderately conservative portfolios. 

For a $1 million portfolio over 20 years, this could mean:

• Annual withdrawal: $58,000 to $63,000

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Putting Your Retirement Plan Into Action

Having $1 million saved for retirement gives you a great foundation, but planning is key to making it last. The important thing is to review your strategy regularly and make adjustments as needed.

It's always a good idea to talk to a financial advisor to tailor a plan that fits your goals. Ultimately, retirement is about enjoying your savings while ensuring you have enough to maintain your lifestyle and security for the long run.

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