To figure out if $1.5 million is enough for retirement, you’ll need to factor in Social Security, pension and other income, as well as fixed and variable costs. For instance, your lifestyle and how long you will live in retirement has a big impact. Let’s break down these and other factors to help you figure out whether you can retire comfortably on $1.5 million.
A financial advisor can help you create a financial plan for your retirement needs and goals.
Factors to Consider
It’s not easy to know if $1.5 million is enough to retire comfortably, partly because so many factors are at play. Here are four common factors to consider:
Social Security. The average monthly Social Security payment is $1,551.66 per month as of November 2022. That works out to $18,619.92 per year in monthly benefits. While living on that amount alone might be difficult, it could be a nice supplement if you already have retirement savings. The Social Security Administration (SSA) usually provides a cost-of-living increase (COLA) every year, which adjusts the Social Security payments for inflation. Thus, these payments should continue to be a nice supplement for Social Security even as costs rise.
Pensions. According to the U.S. Census, the mean amount from pensions and retirement income was $8,538 in 2017. Note that this amount doesn’t separate pensions and retirement income, however. Pensions are becoming increasingly rare in the private sector, but they too can give your retirement a nice boost. Jobs that may still provide pensions include state and local government jobs, teaching jobs and jobs in finance.
Total retirement income. In 2021, the total income for those aged 65 and over was $47,620, according to the U.S. Census. In addition to Social Security and pensions, the Census also considers earnings, supplemental Social Security income, property income and other income. As mentioned earlier, the Census lumped retirement income in with pension income, which totaled just about $8,500. However, that means the average household income, when not including pensions or retirement income, is $39,082. Not many people earn a pension these days, so that figure captures what the average household earns in addition to retirement income.
The 4% rule. A commonly cited rule of thumb in the personal finance community is the 4% rule. With this rule, you can safely withdraw 4% of your investment portfolio each year. If you have a $1.5 million portfolio, that amount is equal to $60,000. If your portfolio still has a stock allocation, it can continue to grow even as you withdraw. One study found most portfolios would last 30 years under this rule or as long as 50 years in some cases. If you add this to the mean Social Security plus supplemental Social Security income, you will have an income of $76,840 per year. That doesn’t include property income, earnings or pensions.
How Much Do Retirees Usually Spend?
The total average annual expenditures for those aged 65-74 in May 2014 was $48,885, according to the Bureau of Labor Statistics. Adjusted for inflation, that works out to $61,175. But your retirement would still be financially secure even without income from earnings or properties. Of course, there are many caveats, including whether Social Security payments will be consistent. For now, though, $1.5 million should allow you to retire comfortably. Here are two things to consider when calculating your spending:
Lifestyle. The numbers we have discussed here are only averages, so it doesn’t mean they will provide a comfortable retirement in all cases. For example, if you’ve worked hard and now want to enjoy a lavish lifestyle of jet-setting and fancy dinner parties, you might find that $1.5 million is not enough. Or if you live in a high-cost-of-living area, you might find that you need additional income. You might have to make adjustments in those cases.
Medical expenses. Medical expenses can vary widely, but they can be significant for some. For instance, Fidelity suggests that the average 65-year-old retired couple will need approximately $315,000 for medical expenses. While that number is a forecast for the rest of your life, suppose you live until age 85. That would mean needing an extra $15,750 per year or $7,875 per person. Our $76,840 of income is still safe if you are single, but for a couple, it would put us right up against our retirement earnings.
Bottom Line
Having a $1.5 million portfolio is no small feat: many people never even reach the seven-figure mark. And in many cases, that amount will set you up for a comfortable retirement. However, it won’t necessarily be enough for everyone. For example, if you want to live a luxurious retirement or live in an expensive area, you may find that $1.5 million is not enough. Thus, as is often the case when dealing with finances, the answer to the question at hand is: it depends. Discuss your situation with a financial advisor to determine whether your retirement will be financially secure.
Tips for Retirement
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