How Much Retirement Does $1 Million Buy?

“If it weren’t for baseball, many kids wouldn’t know what a millionaire looked like.”
–Phyllis Diller

One of the most commonly asked questions I get as a financial planner is “when can I retire?” followed by “How Much Retirement Does $1 Million Buy?”

The answer, of course, is “it depends.”

How much you need to have to retire is a function of how much you want to spend in retirement (not a function of how much you make now) and how old you either are now or plan to be when you stop working.

In my parents’ generation, it seemed like a common number pulled out of the air for how much someone needed to retire on was 1 million dollars. Only 44% of people have even thought about how much money they will need to retire. Of those who have thought about how much they need to retire, 67% think that one million dollars or less will be sufficient to carry them through retirement (see figure 27). Sadly, 28% of respondents in the previously cited survey think that less than $250,000 will be sufficient.

I hope they have pensions.

So, even now, $1 million still remains somewhat of a retirement savings target (or cliff, depending on how you view the survey results) for most Americans.

$1 million feels like a number pulled out of the air. If I told you that you needed $1 million to retire on, you’d think I was providing a number procured from my nether regions. If I told you $1,458,394.48, while it would have a false sense of precision, you’d probably believe it more.

As we saw in “Converting Your Investment Into Income,” a pure retirement savings “target” isn’t enough to get you to visualize your retirement goal or to be happy with it. You need to make that target number more tangible.

So, let’s ask the question.

What Type of Retirement Does $1 Million Buy?

To answer this question, we also need to know your age at the time you retire. Did you join an Internet startup that hit it big and cash out at age 25, or did you work until age 65 and then retire with a million in the bank?

To answer this question, I created a Monte Carlo simulation to run through futures of potential millionaire retirees in five year increments from age 25 to 65. I used the following assumptions:

• Random distribution of S&P 500 returns, U.S. Treasury returns, and inflation based on historical ranges (a betapert distribution for you math types)
• 110 – age stock allocation aside from the Kitces-Pfau retirement shoulder years
• A married couple that was the same age. Each had a probability of dying each year based on U.S. Social Security Administration mortality actuarial tables

I then ran a simulation for the couple withdrawing an initial withdrawal rate of half percent increments from 3% to 10% and then increasing spending each year tied to inflation.

If the last survivor died with money in retirement or reached age 100 with money, I considered it a successful trial.

After all, if you die while still working (e.g., a couple that planned on retiring at age 65 and passed away at age 64), you did not retire, so, for the purposes of this analysis, that was an unsuccessful trial.

I ran 1,000 simulations per pairing (age 25, 3% withdrawal; age 25, 3.5% withdrawal, etc. through age 65, 10% withdrawal). I’d have done 10,000 simulations like I normally do, but I did not want to sit around for days while my computer churned out 1.65 million simulations!

When I build Monte Carlo simulations, I consider 90% success in the simulations as the standard where I approve of the plans. Therefore, I was looking for the highest amount that a couple at each age could live on in today’s dollars and have at least a 90% chance of having money at the end.

Remember, these are rough, rounded numbers, and they’re a simulation. No market performance is ever guaranteed; therefore, YMMV. They also don’t include Social Security payments; the simulation only accounted for how much income $1 million could safely generate without running out of money.

The results

Age of Retirement	Pre-Tax Annual Expenses in Today’s Dollars
25	< $30,000
30	< $30,000
35	< $30,000
40	$30,000
45	$35,000
50	$35,000
55	$40,000
60	$50,000
65	$60,000

While a million dollars will certainly buy more than it did a hundred years ago, it might not get you the standard of living that you expect if you retire with a million in the bank.

Furthermore, the success rates of different withdrawal rates vary wildly with age. Let’s look at the two extremes: a 25 year old and a 65 year old who retire with $1 million in the bank.

It’s interesting to note that in this simulation, if a 25 year old couple wanted to play fast and loose and flip a coin on outcomes, they could live on $45,000 a year and have money left over when the second one died.

A 65 year old couple who wanted to take the same gamble could live on $90,000 and have a 53% chance of running out of heartbeats before running out of money.

All of this demonstrates two maxims:

Maxim 1: A million dollars doesn’t buy as much as it used to, and for most people, doesn’t buy a lot of retirement spending.

Maxim 2: For a given level of retirement spending, the older you are, the less money you need to have saved up, and the younger you are, the more money you need to have saved up.

Perhaps if those people surveyed who thought that less than $1 million was sufficient to retire on could see these numbers, they’d raise their targets.

Otherwise, they may need to make a lot of adjustments in their lives when they retire, or they might have to work longer than they expected.