It’s well-known that Americans’ cost of living is ever-increasing, and retirees are no exception.
But what if you’re a “millionaire next door” – someone who’s lived frugally and saved diligently to retire with one million dollars – and are wondering how to fund your golden years? Maybe you’ve lived below your means for a long time, and now you want to enjoy the fruits of your labor in retirement.
But first, let’s address one of the most common questions we get on this topic…
Can You Live Off Interest on $1 Million?
It’s a question we hear often, and it makes complete sense to ask. You’ve worked hard, saved diligently, and now you want to know: is there enough here to simply live off what your money earns?
The honest answer is: for most people, interest alone won’t quite get you there – but that doesn’t mean $1 million isn’t a wonderful foundation for a secure retirement. It just means we need to be thoughtful about how we use it.
A $1 million portfolio in a high-yield savings account or CDs might generate $40,000–$50,000 per year in interest at today’s rates. That’s meaningful income – but once you account for taxes and the slow creep of inflation, that amount buys less and less over time. Twenty years into retirement, the same dollar amount could feel significantly smaller than it does today.
Investments like stocks and dividends can help your money grow faster, but they carry their own uncertainty. A difficult market early in retirement – before you’ve had time to settle in – can have a lasting impact on your portfolio. Financial planners call this sequence-of-returns risk, and it’s one of the reasons we pay such close attention to those first few years after you stop working.
The good news is that living well in retirement doesn’t require living off interest alone. A thoughtful withdrawal strategy that weaves together your investment returns, Social Security benefits, and a careful drawdown of your savings can absolutely support the life you’ve been looking forward to.
The goal isn’t to never touch your million dollars. It’s to make it last, and to enjoy it along the way.
That’s what the rest of this article is about.
In today’s blog, we’re walking through how to retire on a million dollars and live the life you want.
Where Should You Keep Your Million?
Just because you retired doesn’t mean you necessarily stop investing! Whether you’re ready to submit your final resignation or are planning your retirement income in advance, you still want your money to work for you as much as you can.
Stocks
The S&P 500 (an index fund tracking the top 500 companies) boasts an average annual return of 11.02% in the last decade alone. With a $1 million nest egg, that could return over $110,000 each year. Theoretically speaking, if that return came through every year, you could live off the return alone and never touch the principal.
However, it’s not always that simple: The stock market doesn’t offer any guarantees, and while a return of 11% is the average, that could vary greatly from year to year. That uncertainty is often compounded by a phenomenon affecting retirees known as “the fragile decade.”
Related: Isn’t Money Supposed to Be Fun?
The fragile decade is the timespan from five years before your retirement to five years after, and marks significant life transitions that could affect your finances. You may be beginning to withdraw funds from your retirement accounts, adjusting to a new schedule, relocating, or making other changes.
This time period is referred to as the “fragile” decade because there is less time for your portfolio to recover if there are any big market downturns, and once you start withdrawing your retirement income, it’s much more difficult to get back to the amount you saved.
To help offset risks, we recommend that those in the fragile decade invest more conservatively than their younger counterparts.
Of course, there are also a few ways you can help temper stock market volatility, such as:
- Reducing spending
- Delaying retirement
- Revisiting and prioritizing goals
Annuities
Another option for optimizing your savings is a Qualified Longevity Annuity Contract (QLAC) or other annuities.
A few things to know about annuities:
- They are sold by insurance companies
- They are tax-deferred vehicles, meaning that any money you withdraw from them will be taxed at the time of withdrawal
- They are known to offer more predictable income than stocks
The costs depend on what kind of annuity you purchase (fixed or variable), and it’s important to note that while the amount you can withdraw sans penalties is guaranteed, your overall return is not. You’ll also eventually pay capital gains on earnings.
A QLAC is a specific type of annuity that lets you receive retirement income distributions later in life, allowing you to delay taking income until age 85.
What type of annuity is right for you (if any) depends on your age, savings, income, retirement goals and more.
How Should You Withdraw Your Money to Make it Last?
When it comes to withdrawing your retirement income, you may think you can just take what you need whenever you need it – but it’s not quite that simple.
One of the most popular withdrawal approaches is the 4% rule, which says that if you save $1 million and withdraw 4% per year ($40,000), you should be able to live off of that when combined with your income from Social Security, which will add somewhere around $24,000 per year depending on a number of factors.
The rule uses 4% because they say that there is a good chance of your portfolio making that money back each year in interest and returns, meaning you can live off the interest alone without depleting your portfolio. Basically, it was created as a rule of thumb for people who are worried they will outlive their money.
There are other strategies, too, but you want to incorporate guidance beyond a single rule.
Rather than focusing solely on how much you withdraw, we recommend you also pay attention to the order in which you withdraw from your accounts. Most retirement income plans have multiple sources, such as Social Security, annuities, pensions, and your investment portfolio.
Here’s a simple guideline for how to tackle your retirement withdrawals:
- In general, you should start with your required minimum distributions (RMDs), which – as the name implies – have required withdrawal amounts each year beginning at a certain age. Tax-deferred accounts like 401(k)s usually have RMDs in order to ensure the IRS can get their cut during your lifetime.
- Next, spend from your Social Security benefits (which also have predetermined windows during which you can start collecting benefits).
- Next up is your pension.
- Last but not least are your tax-free accounts like your Roth IRA or your taxable (non-retirement) accounts. Roth IRAs are tax-free accounts and are not subject to RMD rules. Roth IRAs are also great vehicles for passing on to heirs.
Should You Budget in Retirement – and How Can You Get Started?
Even if you’re retiring in the millionaire club, it’s crucial to have a budget so you know where your money is going and if your spending is aligned with your goals. To begin, make a list of all your necessary expenses, like:
- Rent/mortgage
- Utilities
- Food/groceries
- Minimum debt payments
- Phone and internet
Next, make a list of your “wants,” which include vacations, eating out and other “fun” costs. A popular rule of thumb is the 50/30/20 rule, which says that no more than half of your income should go toward needs – leaving 30% for wants and 20% for savings.
Additionally, traditional budgeting standards say that your mortgage payment should be 28% or less of your gross income (which is your pre-tax income). So if you made $6,000 this month before taxes were taken out, your optimal mortgage payment would be $1,680 or less.
Financial planning – even if you have one million dollars saved up for retirement – can feel overwhelming, but with the right strategies, you can face your golden years with confidence. If you’re a millionaire-next-door (or are working toward that millionaire status), these three factors can help you make the most of your savings and live the retirement you want.
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