Congratulations if you’re in the $1 million retirement fund club! Retiring with a seven-figure portfolio provides many possibilities, but it’s not an unlimited retirement fund. Here’s a look at how to plan retirement and enjoy your nest egg in a financially prudent way.
What Does Your Dream Retirement Look Like?
Deciding how to best use your retirement fund requires knowing what you want retirement to look like. There are many possibilities if you have $1+ million, so you can do some dreaming.
What do you want retirement to look like? Where do you want to live, where do you want to travel, who do you want to visit, and what hobbies would you like to do? How frugal or fancy of a lifestyle do you want to maintain?
You’ve undoubtedly worked hard and been disciplined if you have seven figures. Spend some time thinking about how you’d like to enjoy the rewards.
Calculating Your Retirement Income Sources
After daydreaming, it’s time to look at some definitive numbers. The first numbers to look at are your retirement income streams. You might draw from a few income sources:
- Social Security Benefits: Calculate your potential benefits using the Social Security Administration’s tools, based on your earnings record and when you expect to begin taking payments. Social Security might be less than your other income sources, but it’s a reliable addition to your other sources.
- Expected Pension Income: If you’re part of a traditional pension plan, estimate your future payments. Although they’re becoming less common, a pension can be an integral part of your income stream if you have one. They’re almost as certain as Social Security.
- Personal Savings and Investments: If you have a seven-figure portfolio, your personal savings will likely count for a large portion of your retirement income. Determine what a reasonable regular income would be from your investments.
- Other Income Sources: Also count any other income sources you might have. Sources like long-term lease payments, oil royalties, book or music royalties, and structured settlements are much less common. You certainly should count any income sources like these if you have them, though.
A knowledgeable financial advisor can help with each of these calculations. They can provide informed calculations based on your specific information, for an accurate understanding of what you can expect to have regularly coming in during retirement. If you’d like help doing these calculations, you can find a financial advisor who’ll help with this and the rest of retirement planning.
Strategies to Maximize Your $1 Million for Retirement
Learning how you can judiciously use your nest egg is second only to knowing how you can save. There are a few strategies you might use to maximize your $1 million savings during retirement. The following are some of the more common ones.
1. Develop a Sustainable Withdrawal Strategy
Preserving your portfolio’s principal requires not withdrawing too much. If you’re able to make withdrawals but maintain $1+ million in your accounts, you could enjoy the savings while still sustaining them.
This would be referred to as a “sustainable withdrawal rate.” No one can guarantee that a specific rate will be sustainable, until hindsight proves to be 20/20. You’ll have to decide what withdrawal rate you’re comfortable with.
As a general guideline to start with, some people follow a 4% withdrawal rate. This is based on historical data, which shows that withdrawing 4% of your portfolio’s value annually likely won’t result in a decrease in principal. With a $1 million portfolio, a 4% withdrawal rate would be $40,000 per year.
Whether a 4% withdrawal rate is right for you depends on your situation. You can also base withdrawals on portfolio performance, or use another method. A financial advisor can help you settle on a withdrawal rate, taking into account your risk tolerance, retirement income sources, and retirement goals.
To find a financial advisor who’s able to provide individual guidance, use our find a financial advisor tool. A few simple questions let us pair you with an advisor who’s likely well-matched for you.
2. Optimize Your Asset Allocation for Long-Term Growth
Keeping a portfolio well-balanced throughout retirement should help maintain your principal, while adjusting for market volatility, market shifts, and your own needs as you age. In general, this usually requires diversification.
A well-diversified portfolio is better insulated against volatility. A downswing in one asset class will affect only a portion of the portfolio, rather than most or all of it.
Because corrections can affect several assets within one class, it’s often wise to diversify across different asset types and not just different assets within one class. There are many different types of assets you might invest in:
- Stocks / Mutual funds
- Bonds / Bond funds
- Owned real estate / REITs
- Annuities (e.g.. Life, deferred, fixed, variable)
- Precious metals (e.g. gold, silver)
- Cryptocurrency (e.g. Bitcoin, Ethereum)
- Alternative assets (e.g. artwork, collectibles)
These carry varying amounts of risk and potential reward, and you may not want the same risk profile as you age. A knowledgeable financial advisor can help you diversify your assets across several of these classes, and make adjustments to your allocations when it’s appropriate to.
3. Use Tax-Smart Retirement Strategies
Tax planning is a critical element of maximizing your retirement funds. The more you’re able to reduce your income tax and other tax liabilities, the more you can keep in your retirement accounts or spend after withdrawing.
Retirement tax strategies can include multiple methods of reducing different tax liabilities. Some that might be relevant for your situation are:
- Tax-Loss Harvesting: Offset capital gains with capital losses to reduce your tax bill.
- Strategic Withdrawals: Coordinate withdrawals from taxable, tax-deferred, and tax-free accounts to minimize your tax burden in retirement.
- Charitable Withdrawals: Consider Qualified Charitable Distributions (QCDs) from your IRA to fulfill your philanthropic goals while reducing taxable income.
- Other Charitable Giving: Give financially or donate older assets for a potential tax write-off if you itemize your tax return.
- Relocating: Moving to a state without an income tax could reduce your tax liability by your state (not federal) income tax rate.
Some of these are obviously good ideas for most people, while others are a much more significant decision. Before taking any of these actions, it can be helpful to consult with a qualified tax professional such as a Certified Public Accountant (CPA).
Ensuring Financial Security in Retirement
Retirement planning isn’t just about maximizing your $1+ million portfolio, but also ensuring you don’t shouldn’t need to fret over finances later during retirement. You might want to specifically plan for three aspects of retirement.
1. Guaranteed Income Throughout Retirement
Many people find it comforting to know that they should have an income source even if something happens to their portfolio. Near-guaranteed income sources typically include Social Security, pensions, and life annuities.
You might want to supplement Social Security income and any pension income with one or more annuities. Even though annuities usually don’t provide the maximum possible returns, they often do provide the most peace of mind.
2. Planning for Healthcare in Retirement
Healthcare, of course, can be one of the largest expenses in retirement. You’ll want to plan for both medical costs and long-term care costs, as both might be needed and both can be expensive.
Medical costs are usually managed via a combination of Medicare, Medigap or Medicare Advantage plans, an HSA, and maybe additional funds. Be sure you know the deadlines for enrolling in Medicare, which you may do as early as 3 months before turning 65, and understand the different supplemental health insurance options.
Long-term care costs could be managed with long-term care insurance, an HSA, personal savings, and Medicare (if necessary). An insurance agent and financial advisor can help you project possible LTC costs, and devise a strategy for managing them. It’s usually best if you don’t need to rely on Medicare because covered services and facilities can be limited.
3. Estate Planning For Your Heirs
Estate planning won’t give you financial peace about your own retirement, but it can provide peace about your financial legacy. Proper estate planning ensures that your assets are distributed according to your wishes, and it can help minimize the tax burden on your heirs.
You might use a will, trust, healthcare directive, life insurance named beneficiaries, and other official documents to ensure your estate is distributed as you want.
A financial advisor and/or attorney specializing in estate planning can assist with this. Our financial advisor matching guide can pair you with an advisor who’s knowledgeable in estate planning.
Do I Need a Financial Advisor?
Managing a large retirement portfolio can be complex. Doing it well requires taking into account income needs, asset allocation, specific asset purchases, tax strategies, major costs, and more.
Assuming you’re like most people and don’t have specific expertise in each of these areas, consulting a financial advisor and other professionals can be helpful. An advisor, a CPA, and an attorney are three professionals who can assist with different aspects of retirement planning.
A financial advisor will be able to provide individualized guidance on expected income needs, projected sustainable withdrawal rates, portfolio management, account usage, some tax strategies, medical and LTC planning, and estate planning.
Is a Financial Advisor Worth it?
Yes, hiring a financial advisor is probably financially worth it if you have $1+ million in retirement savings. This is no small sum, and just one piece of advice could save you more than the advisor’s fees. They’ll be able to give you informed advice in multiple areas.
Advisors not only provide personalized financial planning, but also offer ongoing management and adjustments based on changing market conditions and personal circumstances. This is something that most retirees don’t have detailed expertise in.
Find a Financial Advisor
If you’re looking for a highly qualified advisor who can help in the many aspects of retirement planning, get paired with one of the advisors in our network. The advisors we’re connected with have worked with retirees at many different income levels, including those with $1+ million portfolios. They have the expertise necessary to get you financially set up for what should be a fun and stable retirement.
