Jul 17, 2024
A study from Northwestern Mutual found American adults expect they need $1.46 million in savings to retire comfortably — a stunning 15% jump from the $1.27 million reported last year. Let’s dream for a moment: Retirement is tantalizingly close, maybe even possible right this second.
At age 58, with $1.5 million spread across IRAs, your 401(k) and some bank accounts, you might feel ready.
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No two scenarios are exactly alike, and retirement is a significant and personal milestone that requires planning tailored to your financial situation. If you’re 58 with $1.5 million, determining how much you can spend per month involves several factors, including life expectancy, investment returns, inflation, and withdrawal strategies.
Before diving into specific calculations, let’s evaluate your bigger financial picture.
Savings and investments: You have $1.5 million in savings. Assess whether these funds are in tax-advantaged accounts (like IRAs or 401(k)s), taxable brokerage accounts, or other investment vehicles. If they're taxable, it will impact how much you can withdraw.
Social Security: Determine when you plan to start collecting Social Security. The longer you delay (up to age 70), the higher your monthly benefit will be.
Other income sources: Do you have additional income sources, such as pensions, rental income, or part-time work?
The 4% rule
A popular rule of thumb says you can safely withdraw 4% of your retirement savings annually without running out of money over a 30-year retirement.
If you have a $1.5 million nest egg, the 4% rule means you can withdraw $60,000 the first year and then just adjust that amount for inflation in the following years. To manage your monthly budget, you divide this annual amount by 12, which would be $5,000 in the first year. This strategy helps ensure that your retirement funds last, providing a steady income while taking into account market fluctuations and life expectancy.
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It’s important to note that while the rule is a good starting point, it’s also based on historical data and assumes a balanced portfolio of stocks and bonds. It doesn’t account for future market volatility or changes to your lifestyle and health. Financial expert Suze Orman called the rule “dangerous” and urged retirees to take the least amount possible from their retirement savings.
Morningstar’s annual study says the highest safe withdrawal percentage — assuming a balanced portfolio, fixed real withdrawals over a 30-year retirement, and a 90% probability of success — is 4%.
It adds that retirees can enjoy even higher starting withdrawals, “assuming they’re willing to accept other trade-offs, such as fluctuating year-to-year real cash flows and the possibility of fewer leftover assets at the end of a 30-year period.” You can consider a higher withdrawal rate if your portfolio allocation is more aggressive, but this is a riskier strategy.
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Detailed Spending Plan
It’s time to consider your spending, breaking those expenses into three primary buckets. Fixed expenses would include housing, utilities, healthcare, insurance, and groceries should be prioritized in your budget. Discretionary spending, like travel, hobbies, dining out, and entertainment, can be adjusted based on your financial situation. The third bucket is healthcare and this spending can increase as you age. Consider long-term care insurance or setting aside additional funds to cover these costs.
Cost-saving strategies
Regardless of how much you plan to draw from your retirement accounts, it’s good to look for potential ways to either save more or bring in extra income to build a cushion.
Consider moving to a smaller home or a lower-cost area to reduce housing expenses, and strategize withdrawals from different accounts to minimize tax liability. For instance, withdrawing from taxable accounts (i.e. 401(k)) first will allow tax-advantaged accounts (Roth IRA) to grow.
And if possible, delay claiming Social Security benefits until age 70 to maximize your monthly benefit.
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Chris Clark is a Kansas City–based freelance contributor for Moneywise, where he writes about the real financial choices facing everyday Americans—from saving for retirement to navigating housing and debt.
