Is $1 million enough to live on? For that matter, how can one know that any amount is “enough?” The answer may surprise you.
There are several factors that can determine how long — or how short — $1 million (or any amount for that matter) will actually last. Some studies conclude it’s around 20 years, on average. The real answer? It depends. If not managed properly, a golden nest egg can become a short-lived payday. Despite how long it took you to amass this much, $1 million can disappear very quickly.
When determining how much a client needs to retire, our team at Linscomb & Williams looks at several factors.
1. Spending habits
As you probably guessed, your spending habits are one of the most important inputs to estimating your probability of financial success. If you can keep your spending under control, your nest egg will potentially last longer. Obviously, the more you spend, the more you’ll need. Further, when you take this money from your retirement plan, the more it costs. When you withdraw from your retirement accounts, not only are you depleting your reserves from the direct withdrawals themselves, but you are also diminishing the ability to accumulate more investment earnings by selling off some of your capital.
Certain spending is necessary. The biggest expenses for retirees are housing, transportation, and healthcare. For most families, it is not the necessities of spending that create a problem; more often, it is the discretionary decisions about spending.
2. Location
Location, location, location. Like real estate, the value of your $1 million can be greatly affected by where you live. The cost of living you experience in the area where you live and ultimately retire influences your spending, tax picture and your overall savings. A high-cost address can take a serious bite out of your financial longevity.
Cost of living considerations are more important now that employers are increasingly more open to remote work arrangements. Think wisely about the long-term financial ramifications of where you choose to live, especially during retirement.
3. Length of retirement
The general consensus is that the sooner you can retire, the better. That may be true, but this is not necessarily the case for your finances. A longer retirement requires careful financial management, and potentially, a larger nest egg.
So, while your spending in retirement is very important, the actual length of your retirement is the other side of your spending coin. There are financial planning strategies that aim to stretch your money, such as waiting to receive Social Security benefits until later, if you can, or even working a part-time job you enjoy during retirement to give yourself an additional financial cushion.
4. Plans for Golden Years
Likely, the most enjoyable part of planning your retirement is deciding how you will spend it. Will you spend quality time with family and friends, simply enjoying the opportunity to live life without work? Or will you travel the world, checking off destinations as you circle the globe? Although your Golden Years are meant to be enjoyed, this time period can burn through your savings if you’re not careful. Discuss your plans with a financial advisor so your savings adequately reflects the spending associated with your lifestyle goals.
5. Financial goals
No matter what financial trends are occurring or what demographic statistics say, remember that your personal financial situation is unique and specific. A million dollars can seem like a lot or a little, depending on your financial goals. One thing we’ve learned in working with families over 50 years is that this planning is not a “one size fits all!”
Are you looking to donate to charity? Pay for your grandchildren’s higher education? Is your goal to leave a sizable legacy to your family? Each of your goals has important implications for how your funds should be saved and invested, as well as their tax consequences.
6. Financial advisor
As you can see, there are a number of considerations to keep in mind when considering your financial longevity. The more money you have, the more you can lose. This can make working with a financial advisor even more important for your financial goals. A financial advisor can take an in-depth look at your goals, needs, financial habits and more to create a plan that maximizes your financial health and ultimately prolongs your asset base.
Your spending, investment choices, and retirement and tax planning can impact your nest egg. Working with a financial advisor can potentially help that $1 million of yours, or whatever your individual number happens to be, last as long as possible.
