If you’ve built up a $3 million nest egg, congratulations. That’s almost 35 times what the average American has in their retirement accounts. It takes dedication to build up a fund of that size. The great news is that, depending on your situation, you should safely be able to withdraw around $120,000 a year from it once you retire.
Read on to find out where that number comes from, and how to know if you’ll have enough. And if you’re trying to build up a similar retirement balance, click here to learn more about how these top IRA brokers can help.
You can withdraw around $120,000 each year
Many financial planners use something called the 4% rule to estimate how much you might need in retirement. It was created in 1994 by a financial advisor called William Bengen. Given that stock market performance can fluctuate wildly, he wanted to know how much retirees could safely withdraw, even in the absolute worst conditions.
He analyzed a half-century’s worth of 30-year retirement windows, starting in 1926. What he discovered was that if you take 4% out of your nest egg in your first year of retirement, you can be confident you’d be able to take that amount, plus inflation, for the coming 30 years.
So if you have $3 million, you could withdraw $120,000 in your first year. If inflation was around 3%, you could safely take $123,600 in the next year, and so forth. History tells us you can be pretty sure that your money will last at least 30 years — and in many scenarios, it will last longer.
Knowing if your retirement fund is big enough
Having $3 million in your retirement and brokerage accounts is a sizable amount. Even so, it’s a big leap to retire and rely on Social Security and your retirement investments to stay afloat. It can be hard to plan because there are so many unknowns. But you can still make some pretty solid estimates based on your current income and spending.
For example, a lot of people estimate their retirement spending will be about 80% of what it is now. You won’t need to get all of that from your nest egg. Factor in other sources of retirement income, such as Social Security, rental property income, or other cash. Then work back to see how it compares.
Let’s say you’ll get $22,000 a year in Social Security and $120,000 from your retirement funds. That comes to $142,000 in annual income. If that’s 80% of your current income, we’re talking about $177,500 a year. If you’re earning about that now, you can be fairly confident you’ll be able to maintain the same standard of living for the whole of your retirement.
Map out different retirement scenarios
Think of retirement planning like shopping for clothes — you can’t just go to the store and buy the same size, style, and color as everybody else. There’s no one-size-fits-all retirement, so it’s important to treat these financial rules as a starting point that you adapt to your situation and needs.
For example, if you plan to retire early and want your nest egg to stretch to 40 years or more, you might instead take just 3% ($90,000). On the other hand, if you’re comfortable with risk, you might decide to take 5% ($150,000) and alter your asset allocation accordingly.
Here are some factors to explore.
Confidence
The 4% rule is based on a 90% probability that your money will be enough for your whole retirement. But if you’re OK with more uncertainty, you might be able to withdraw 5% or 6% a year. For example, Fidelity’s simulations predict retirees could withdraw over 5% and have a 75% probability the money will last.
Balance of risk in your portfolio
Every portfolio will have a mix of assets with varying degrees of risk and returns. Many people shift to a more conservative ratio of stocks vs. bonds as they approach retirement. But if you’re worried your fund won’t go far enough, you might take a different approach.
Retirement length and any healthcare needs
This is one of the trickiest parts of retirement planning because it’s something few people really want to think about too closely. But you can use your family history to take a guess. And if you’re retiring early, you’ll need your money to go further.
You don’t have to go it alone
Retirement planning is hard, even if you’ve built up a decent amount of money. There are retirement calculators and other resources online, but you don’t have to work all of this out on your own. Consider speaking to a financial advisor who could help you map out different scenarios. You’ve worked hard to build up a $3 million fund — you deserve the golden years that you want from it.
