A $1 Million Budget

For many, the word "millionaire," a term coined in 1762, calls to mind images of lavish wealth and extravagant lifestyles. Simply having this much money once represented a ticket to life on Easy Street. These days, thanks to cost-of-living increases and lifestyle changes, retiring on $1 million isn't as carefree. It now requires smart budgeting to ensure this nest egg lasts for a retiree's remaining years.

Though it does not provide for the sumptuous lifestyle of years past, having $1 million for retirement is still a blessing. Many retirees rely on 澳洲幸运5开奖号码历史查询:Social Security benefits for at least 50% of their income. According to data released in 2024, 37% of men and 42% of women aged 65 or older who receive Social Security rely on it for 50% or more of their income.

A retiree with exactly $1 million may not be spending much time at The Breakers in Palm Beach or the Plaza Hotel in New York. But invested smartly, this sum should ensure they can live in a typical U.S. big city—such as Chicago, Los Angeles, or Houston—without ꦆworrying about poverty or an inability to pa🍎y the bills.

Let's take a closer look at two of the key strategies you might use to stretch $1 million throughout their retirement years. One technique is to purchase an 澳洲幸运5开奖号码历史查询:immediate annuity, which converts the retiree's lump sum into a guaranteed monthly paycheck for the remainder of their life. Another is to invest the money in a standard 澳洲幸运5开奖号码历史查询:portfolio, typically one diversified with 澳洲幸运5开奖号码历史查询:mutual fund, stock, an♌d bond investments, then withdraw a fixed percentage of that portfolio each year to pay living expenses.

Immediate Annuities: Advantages

For retirees who worry about running out of money at some point, an immediate annuity offers perhaps the single most attractive feature of any retir༺ement product:𝓀 a fixed-income stream that is guaranteed for life—whether the purchaser dies the day after buying the annuity or lives to be 120.

"Purchasing an immediate annuity is like buying a pension. You exchange a lump sum for the insurance company promising to pay you for the rest of your life," says , 🍬CFP, Meridian Financial Advisors LLC, Holliston, Mass.

A couple of factors determine the amounts of these payments. One is prevailing interest rates; when interest rates are high, annuities pay more. The other factor is the retiree's 澳洲幸运5开奖号码历史查询:life expectancy. The longer they are expected 💖to live, the lower the monthly payme൲nts. For this reason, women, who generally outlive men, receive smaller annuity checks on the same balance.

Immediate Annuities: Disadvantages

Annuities feature two distinct disadvantages: tax treatment and illiquidity. While most investment income earned over a long period is taxed at long-term capital gain rates, annuities are taxed at ordinary income rates. The difference between the two depends on the investor's tax bracket; it might be immaterial, but it might also be significant. For a high-income earner, 澳洲幸运5开奖号码历史查询:the top ordinary tax rate is 37%. Long-term capital gains, by contrast, are taxed at 0%, 15%, or 20%.

The other problem with annuities is that owners are effectively limited to their monthly checks. "Buying an immediate annuity when interest rates are still relatively low is not a good idea, especially with the high upfront fees and 澳洲幸运5开奖号码历史查询:surrender costs💫 associated with annuit🍸ies, because the fixed payments will be low and won't increase even if interest rates go up," says , CFP, wealth management advisor at Avalan Wealth Management in Santa Barbara, Califor⛄nia. What's more, you typically cannot withdraw a large chunk from the annuity, such as for an emergency or a major purchase, without incurring penalties.

It comes down to priorities. If having income for life is a bigger priority to a🌌 retiree than having access to their money in full, an annuity might be the best option. Otherwise, retirees should look elsewhere—or at least not invest all or most of their retirement funds in an annuity. 

Traditional Portfolio: Advantages

Another strategy to make $1 million last through retirement is to place the money in a 澳洲幸运5开奖号码历史查询:diversified portfolio and withdraw a set percentage per year, indexing that amount to 澳洲幸运5开奖号码历史查询:inflation.

"A globally diversified portfolio allows investors to match their individual risk capacity with their individual risk exposure, provide flexibility in terms of access to their money, potentially provide flexibility in terms of tax exposure, and provide potentially higher payout rates than what is provided by products in the insurance market. While a 4% withdrawal rule is a good start, I usually tell clients they can afford 5% to 6% if they are globally diversified with tilts towards the known sources of expected return, such as small-cap and value stocks," says Mark Hebner, president and founder of in Irvine, California, and author of Index Funds: The 12-Step Recovery Program for Active Investors.

Traditional Portfolio: Disadvantages

The main downside to the traditional portfolio strategy is that, unfortunately, no method exists to project future market returns or inflation rates with any certainty. The years following the 澳洲幸运5开奖号码历史查询:Great Recession have been excellent for stocks and 澳洲幸运5开奖号码历史查询:mutual funds, and equally good as far as low inflation is concerned. However, a protracted 澳洲幸运5开奖号码历史查询:bear market or a period of unusually high inflation—the 1970s featured both—will cause a retiree's $1 million to evaporate much more quickly if it is invested using the strategy outlined above.

The Bottom Line

Investing $1 million in a traditional portfolio and taking yearly withdrawals provides retirees with more financial flexibility than with purchasing an annuity. The returns from mutual funds, historically, have been stronger than annuity returns. And in a low interꦺest rate environment, annuities are going to have less generous payout rates than in times when interest rates are higher. On the other hand, an annuity offers a retiree one feature a traditional portfolio does not: an iron-clad guarantee they will never outlive their money.