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How Long Will 2 Million Dollars Last In Retirement?

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Doug Carey
President
WealthTrace

Key Points 

  • Having a $2 million nest egg (or war chest, depending on how you think about what you'll be doing in retirement) gives you a lot of flexibility heading into retirement. In this article we use the WealthTrace Retirement Planner, which is available to the public as well, to look at retirement scenarios. 
  • Everyone's situation will be different. So much depends on what your goals are for retirement.
  • Running a Monte Carlo simulation is a great way to stress test any long-term investment return scenario. 

When people start thinking about retirement, they come at it from a number of different angles. They might wonder if they can retire at a certain age; we've written about how to retire at 50 and at other ages. Or they might simply wonder at what age they can retire given their current savings and spending habits. 

There's another way into the conversation. As people who have been thinking about and planning for retirement for a while get closer to their anticipated retirement date, they start to have a decent idea about what their investment balances at retirement might look like. And it's natural to wonder how long that balance might last. 

Running The Numbers

So how long will $2 million last in retirement? 

Let's consider a hypothetical couple that is 60 years old and hoping to retire, like, yesterday. As soon as possible, for sure. They have $2 million saved and think they are probably ready, but want to be as certain as they can be. Their investments are roughly made up of 60% stocks (averaging around 7% annual returns) and 40% bonds (averaging 3% annually). Three quarters of their investments are in IRAs. They're hoping not to take Social Security--a combined amount of about $50,000--until full retirement age. 

On the expense side of things, their home is paid off, and they think a conservative (high) estimate of spending will be $80,000 annually, pre-tax. 

We ran these numbers, along with an assumed annual inflation rate of 2.5%, through the WealthTrace Retirement Planner. (You can do the same via a free trial of the program.) Let's see how things look for them:

 Investment Balances With $2 Million In Retirement 

That's a pretty picture: An investment account balance actually going up in value during retirement. That's every retiree's dream. Similarly, here's what their income sources versus expenses are projected to look like:

Income Vs. Expenses With $2 Million In Retirement 

As their expenses go up (mainly due to inflation) over time, so do their investment balances. 

Stress Tested

OK, it may not exactly be news that a debt-free couple with $2 million should be able to live on $80,000 a year for 30 or so years. Let's push on this a bit and see what happens. 

First, to really stress test their plan, we'll want to see at least at 75% probability of success when running a Monte Carlo simulation. (What's a Monte Carlo simulation? Find out more here.) We can do this with WealthTrace, and when we do, things are looking good:

Monte Carlo Probability Of Success 

The Monte Carlo simulation runs through 1,000 potential scenarios, and not even one of those scenarios puts them below a $0 balance at the end of the plan. (Even the worst-case scenario, represented by that grey line at the bottom, puts their ending account balance at a comfortable $400,000 or so.) 

WealthTrace allows you to make changes to a plan "on the fly," meaning you can see what would happen to the Monte Carlo results if you changed certain variables like retirement age, living expenses, and more: 

 Monte Carlo When Changing Assumptions

Our couple is ready to retire, and we can't turn back the clock, so we won't change their ages. But what if we bump up their spending by $20,000 a year? Even then, things look pretty rosy: 

 Monte Carlo With Higher Spending

Or, instead of bumping up their spending, what if they start making annual charitable contributions of $25,000? WealthTrace can handle that scenario too--and so can their plan:

 Monte Carlo With Charitable Contributions

Making It Last

A couple in this position has options--far more options than we could cover in one article. For example, if their tolerance for market volatility is low (what would they do in case of another 2008?), they could invert the percentage of their funds invested in stocks and bonds, making the numbers something like 40% and 60%, respectively, and they would be fine. 

It's an ideal case, really, where the main questions are not how to cover expenses in retirement or worrying about whether they money will run out, but how best to enjoy retirement. 

It's a great problem to have. Be sure the program you use for your retirement planning can cover all the bases.     

WealthTrace covers all the bases. Small changes to savings and spending can have a big effect on a plan. Sign up for a free trial of WealthTrace to find out more.

 

Do you want free tips on how to retire early? How about retiring stress-free? Learn how to make sure you do not outlive your money by signing up for our free articles.

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Pic of me 2
Doug Carey
President
WealthTrace