How can I make sure my $1.5 million in IRA lasts until retirement starting at age 60?

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Making your savings last until retirement can be complex in practice, but it all comes down to your income vs. expenses. In other words, it means understanding how much your portfolio can generate at a more risk-adverse time in your life versus what it costs each year to maintain your lifestyle. Retiring at age 60 can create some problems because that’s earlier than you can claim Social Security and use Medicare. With $1.5 million in your IRA, you’ll want to carefully plan your withdrawals to account for the future, as well as any growth you may accumulate as you retire.

Have questions about retirement planning? Talk to a financial advisor today.

What kind of income can your portfolio generate?

Cash assets

You can move parts of your IRA into deposit, cash assets such as a high-yield savings account or certificates of deposit (CDs). This would keep your money extremely safe, but your returns might only keep pace with inflation. While the best savings rates today are quite high around 4.5%-5%, they won’t always be that high in the coming decades. At a standard 4% withdrawal rate, that would give you a portfolio income of $60,000 over 25 years, with your money likely growing at the same or lower rate.

Bond and Dividend Income Investments

Income investing means putting your IRA into assets like bonds and dividend stocks. They generate regular payments without selling the underlying asset, making them a popular choice for retirees looking to make their portfolios last. Through 2023, the bonds paid an average of 4% to 5%, according to the Fed in St. Louis. In the middle of that range, they could provide you with an income of around $67,500 per year without dipping into your capital.

Income using an annuity

Like bonds and dividends, annuities are a popular choice among retirees looking for income security. With an annuity, you buy a contract from a life insurance company that guarantees you a fixed monthly payment for life, depending on the purchase price and other factors. According to the Schwab Fixed Income Annuity Calculator, a single lifetime, $1.5 million fixed income annuity purchased at age 60 could pay around $8,000 per month, or $96,000 per year, for your entire life.

Investments in mixed assets

Finally, you can invest in mixed assets such as index funds and bond portfolios. This will allow you to balance growth and security as you see fit, but with more volatility. In this scenario, you also need to sell assets to generate income.

According to Vanguard, a fairly risk-adverse portfolio of 70% bonds and 30% stocks generated an average annual return of 8.1% over the period 1926-2021. Using this type of portfolio, you would likely have enough to match or exceed the income options above. However, be prepared to have more tax situations to consider, as well as illiquid assets and more overall risk.

What will you collect from Social Security?

We also need to factor Social Security benefits into your planning. Since an IRA balance of $1.5 million can mean you’ve had high income throughout your life, let’s say you receive $2,000 starting at age 62. That’s $24,000 a year in Social Security benefits. That could be a substantial boon to an already pretty bright retirement savings picture.

While we estimate your Social Security benefit in this article, it is not necessary. The SSA will provide you with your Social Security statement so you can know how much to plan for as you approach age 62 and beyond. Consider consulting a financial advisor as you plan for retirement and consider Social Security benefits and when to take them.

Expenses and taxes

So with this person’s current savings, they have several options to make their portfolio last for the rest of their lives. Including Social Security, a bond portfolio alone could generate enough income to meet your retirement plans. The question is whether this is enough for you to live a comfortable life because everyone’s individual retirement plans are completely unique.

Your lifestyle and inflation

First, you’ll want to understand how much your lifestyle costs. For example, do you like expensive trips or are you happiest when you are alone with your hobbies? How much is the house, utility expenses, bills and personal needs and weekend entertainment? It may be helpful to sit down with a financial advisor to plan your monthly retirement budget, as this will determine what kind of portfolio income you need to generate.

At the same time, remember that where you live will have an effect on how inflation affects you. While nationally, inflation averages 2%-4% annually, if you live in an expensive city and/or rent your home, that number can be much higher. Your portfolio performance and withdrawal rates will need to reflect this.

Required Minimum Distributions (RMD)

Starting at age 73, you’ll need to start taking RMDs from pre-tax retirement accounts like an IRA. Especially for households that have a pure income plan, this can be disruptive.

The younger you are and the more savings you have, the higher this RMD will be. In your case, for example, if you have $1.5 million in your IRA at age 73, you’d need to withdraw at least $56,603 a year to avoid penalties, according to Schwab’s RMD calculator.

tax

As a pre-tax portfolio, your IRA will generate income taxes on everything you take out of it. This can be handled broadly in one of three ways.

First, you can plan to pay these fees. Anticipate your income tax in your annual budget and adjust your disposable income downwards by that amount. Second, you can convert your IRA to a Roth IRA. You would have to pay income taxes on the entire amount carried over in a single tax year, reducing your savings considerably, but it would eliminate federal taxes entirely on your retirement income. Of course, you’ll have to be prepared to pay that massive amount of taxes in the meantime, so this isn’t always the right move for everyone.

Insurance and medical assistance

Finally, as you plan your budget and expenses, don’t forget to consider insurance costs and health care needs.

In addition to the current insurance you pay for, such as homeowner’s or renter’s policies, in retirement you’ll likely need long-term care insurance and Medicare gap coverage. Combined, you should expect this to add several hundred dollars a month to your bills. As you age, you’ll likely have greater health care needs as well. This will mean more expenses which again will add to the budget and costs.

Planning for these expenses and making sure you fit your lifestyle and investments around it is key to making sure your IRA lasts a lifetime.

Tips for IRA Management

• A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be difficult. The free SmartAsset tool matches you with up to three verified financial advisors serving your area, and you can have a free introductory call with your matched advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help reach your financial goals, get started now.

• What should you do with your IRA in retirement? If you’re like most people, you’ve spent your working life thinking relatively little about this account. Check out our SmartAsset guide to retirement IRAs to learn more.

• Keep an emergency fund handy in case you face unexpected expenses. An emergency fund should be liquid — in an account that isn’t exposed to significant fluctuations, such as the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But a high interest account allows you to earn compound interest. Compare savings accounts from these banks.

• Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with prospects and offers marketing automation solutions so you can spend more time converting. Learn more about SmartAsset AMP.

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