Got $1 Million in Retirement Savings? Here's How Much You Can Afford to Spend Each Year

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There's no magic savings number that guarantees you a financially secure retirement. Some people may do well on $400,000 in savings, while others might struggle with $800,000. But generally speaking, if you can retire with $1 million in your individual retirement account (IRA) or 401(k), it puts you in a pretty strong position to cover your senior expenses and have money left over to enjoy your life.

That said, $1 million in retirement savings may not give you as much annual income as you'd expect. Here's why you may want to aim higher.

How much yearly income are you really looking at?

Retiring with $1 million is quite impressive, but that money might have to last for 20 years, 25 years, or more. For this reason, it's important to be careful about how much you withdraw every year. You may want to follow the popular 4% rule.

The rule states that if you withdraw 4% of your investment portfolio in your first year of retirement and then adjust future withdrawals for inflation, your savings should last 30 years. But if you follow that guidance, a $1 million nest egg only results in about $40,000 of annual income.

That's not a negligible amount, but it's also not a ton. Even when we account for Social Security on top of that, you're talking about another $23,000 per year based on what the average retired worker collects today.

And sure, in time, that average monthly benefit is apt to increase due to inflation. But since Social Security cuts are possible, that $23,000 may be a good number to work with.

In that case, you're talking about $63,000 in yearly income. That's a decent sum considering that your home might already be paid off and some of your expenses, like commuting, may be lower. But if you like the idea of getting more than $40,000 a year out of your savings in retirement, then you'll need to aim higher.

How to set yourself up with a larger nest egg

There's nothing wrong with not being satisfied with a $1 million nest egg. It doesn't make you greedy -- it makes you ambitious. But if you want a larger savings balance, prepare to do two things:

1. Start saving from a young age
2. Invest your IRA or 401(k) heavily in stocks

Over the past 50 years, the stock market's average annual return has been 10%. That accounts for years when the market did great and years when it didn't.

If you invest your savings in stocks and snag that same 10% annual return, you can grow a relatively small amount of money each month into a large sum -- if you give yourself a long savings window.

If you're talking about a $250 monthly contribution over 25 years, at a 10% annual return, that leaves you with $295,000. But if you invest $250 a month at that same return over 40 years, you're looking at $1.327 million instead. Make it 45 years, and your balance grows to $2.156 million.

Of course, if you're already past your early 20s, then you may no longer have an opportunity to invest over a 45-year period. But if you're in your late 20s, 40 years may be doable. And if you're older, that's OK, too. Just start saving and investing for retirement right now if you haven't started yet.

Retiring with $1 million puts you well ahead of the average older American today. But there's also nothing wrong with wanting to do better so you can enjoy even more annual income once your senior years roll around.

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