After years of saving and investing, the next challenge is determining how those assets will support your lifestyle in retirement. It’s a shift that often leads many retirees to the same question: will my savings last?
To estimate how much income a portfolio may support, many retirees start with the 4% rule, which is designed as an annual withdrawal guideline. Under this approach, someone with a $1 million portfolio might withdraw $40,000 during the first year of retirement, then adjust future withdrawals upward with inflation rather than continuing to withdraw a fixed 4% each year.
The 4% rule is only a starting point, however. How long retirement savings last depends on a range of factors, including taxes, investment returns, inflation, Social Security benefits, healthcare costs, spending patterns, and longevity.
How Long Will My Retirement Savings Last?
Based on historical market research, in general the 4% rule suggests that a diversified portfolio may sustain roughly 30 years of withdrawals adjusted upward annually for inflation. By that measure:
- A $500,000 portfolio may support approximately $20,000 per year before taxes
- A $1 million portfolio may support approximately $40,000 per year before taxes
- A $2 million portfolio may support approximately $80,000 per year before taxes
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For illustrative purposes only.
Why Rules of Thumb Are Only a Starting Point
The 4% rule is based on historical assumptions about investment returns and portfolio construction, but actual retirement outcomes rarely follow a single pattern. Just as important, it does not account for when those returns occur during retirement.
The timing of market returns matters. If the market declines early in retirement, a retiree may need to sell investments at lower values to generate income. Those shares can’t benefit from a later recovery because they’ve already been sold. Even if average returns end up being similar over time, losses that occur early in retirement can have a greater impact on portfolio longevity. This is known as sequence-of-returns risk.
Retirement calculators that project a single average return across decades can understate this risk. A more personalized analysis can evaluate different market scenarios alongside your portfolio, income sources, and spending needs, to better understand how a retirement plan may perform over time.
What Affects How Long Retirement Savings Last?
While portfolio size matters, it is only one part of the equation. Several other factors can have a significant impact on how long retirement savings may last.
Withdrawal rate: Even small changes in withdrawal rates can have a significant impact over time. A 5% withdrawal rate may ultimately produce materially different outcomes than a 4% rate over a 25- or 30-year retirement.
Investment returns and portfolio mix: Portfolio allocation influences both growth potential and risk. A conservative portfolio may not generate enough growth to keep pace with withdrawals and inflation, while an aggressive portfolio may experience more volatility and potentially expose you to more risk.
Sequence-of-returns risk: The order of returns matters, not just the average. Early losses in retirement can have a disproportionate effect on how long your portfolio lasts.
Inflation: Spending needs generally rise over time, so a plan that works at today’s prices may look different in 10 or 15 years as actual costs increase.
Taxes: Withdrawals from traditional IRAs and 401(k)s are taxed as ordinary income, and required minimum distributions (RMDs) can increase taxable income and affect tax brackets, Medicare premiums, and the net amount available to spend.
Healthcare costs: Healthcare spending often increases with age and can be difficult to predict. Long-term care needs, in particular, can represent a significant and sudden draw on savings.
Spending flexibility: Those who can adjust their spending in response to market conditions may be better positioned to sustain their savings over longer periods than those whose spending is more fixed.
How Taxes and Withdrawal Order Can Change the Answer
While market returns are largely outside your control, taxes are one area where planning decisions may influence retirement outcomes. Not all retirement accounts are taxed in the same way, and the order in which withdrawals are taken can affect both annual taxes and portfolio longevity.
Withdrawals from traditional IRAs and 401(k)s are generally taxed as ordinary income. Withdrawals from Roth accounts, if qualified, are not. Coordinating withdrawals across account types can reduce the total tax paid over the course of retirement.
Required Minimum Distributions (RMDs) generally begin at age 73 or 75, depending on birth year, and may increase taxable income more than anticipated. Planning ahead for RMDs, including evaluating whether Roth conversions may make sense before distributions begin, can be an important part of building a tax-efficient withdrawal strategy.
How Social Security Fits Into the Calculation
Withdrawal order isn’t the only factor that can affect your tax picture and portfolio longevity. When you claim Social Security can also play an important role.
Social Security provides a source of monthly income for life, which can reduce how much you need to withdraw from your portfolio. Generally, the more income Social Security provides, the less you may need to draw from your savings over time.
You can begin receiving Social Security benefits anytime between ages 62 and 70. Claiming early results in a lower monthly benefit, while delaying benefits may increase the amount you receive each month
Bridging the gap with portfolio withdrawals or other income and delaying Social Security can provide a higher monthly benefit later and potentially may reduce the long-term draw on savings. Whether that strategy makes sense depends on factors such as longevity, taxes, other income sources and overall financial goals
Ways to Help Retirement Savings Last Longer
Retirement outcomes are influenced by more than investment performance alone. Decisions around taxes, withdrawals, portfolio management, and Social Security can all affect how long retirement assets may last. No single action guarantees a particular outcome, but together they may improve the odds of a sustainable retirement income.
Tax-aware withdrawals: Drawing from accounts in an order that manages annual taxable income may help reduce total taxes paid over retirement, leaving more of the portfolio available over time.
Diversified investing: Keeping enough in growth-oriented investments to stay ahead of inflation, while holding enough in more stable assets to cover near-term spending needs, can help limit the damage from sequence-of-returns risk.
Cash reserves for near-term spending: Holding one to two years of spending needs in lower-volatility assets could potentially reduce the need to sell long-term investments at depressed prices during a market downturn. However, such cash allocations may reduce growth potential and may not keep pace with inflation.
Healthcare and long-term care planning: Addressing potential healthcare costs in advance, through insurance coverage or dedicated reserves, may help protect the broader portfolio from excess withdrawals.
Revisiting the plan regularly: A retirement income plan built at age 65 may need adjustments at 72 or 78 as spending, health, markets, and tax law evolve. Regular reviews with a financial advisor can help the plan stay aligned with changing spending needs, health considerations, market conditions, and tax rules.
When to Speak with a Financial Advisor
Rules of thumb and retirement calculators may help estimate a general range, but they cannot account for your specific mix of assets, income sources, taxes, and spending goals.
Modera works with retirees and pre-retirees to develop coordinated retirement income strategies through comprehensive financial planning. A fee-only fiduciary advisor can help align retirement income, tax, and investment decisions with your long-term goals..
Talk with a Modera advisor about creating a retirement income plan designed to support your spending needs and help your savings last throughout retirement.
FAQs
How long will my retirement savings last?
It depends on a range of factors including your withdrawal rate, investment returns, taxes, inflation, Social Security income, healthcare costs, and life expectancy.
How long will $1 million last in retirement?
Using the 4% rule as a starting point, $1 million may support roughly $40,000 per year in withdrawals before taxes. How long it actually lasts depends on your specific situation.
What is a safe withdrawal rate?
There is no single withdrawal rate that is appropriate for everyone. The 4% rule is the most common rule of thumb, built around withdrawing 4% of the portfolio balance in year one and adjusting for inflation annually.
How do taxes affect retirement withdrawals?
Taxes can influence how much income you have available to spend and how quickly retirement assets are depleted. Withdrawals from traditional IRAs and 401(k)s are generally taxed as ordinary income. Roth withdrawals, if qualified, are not taxed.
How does Social Security affect how long my money lasts?
Social Security can provide monthly income for life, which may reduce the amount you need to withdraw from your portfolio each year. In some cases, benefit claiming decisions can have a meaningful impact on portfolio longevity.
What is sequence-of-returns risk?
Sequence-of-returns risk refers to the impact of the order in which investment returns occur. Market declines early in retirement may have a greater effect on portfolio longevity than similar declines that occur later, particularly when withdrawals are being taken from the portfolio.
