How to retire on less than $1 million and never run out of money

Many people strive to achieve $1 million in savings before they reach retirement, but the reality is that most Americans struggle to meet that savings threshold. Average retirement account balances for those aged 55-64 averaged about $208,000 at the end of 2022 in plans administered by Vanguard, according to the asset management giant.

There’s nothing magical about the $1 million mark, but the more you’re able to save, the more comfortable you’ll be during your golden years. But that doesn’t mean those who fall short of the mark are doomed to a lifetime of work. Here’s how to think about retirement if your finances are below seven figures.

How much do you need to retire?

How much money you need to retire will depend on the lifestyle you want to live and how long you expect to live it. Of course someone who wants to travel often, live in an expensive city and frequently dine out will need more than someone with a more simple lifestyle.

Before you retire you’ll want to think about a detailed budget to gauge what your annual spending may look like once you’re no longer working. Here are a few items to consider.

• Housing: Where you live can have a big impact on your cost of living. Will you have a mortgage payment or live in a house that’s paid off? Which state you retire in can also have a major impact on your budget. Think through these issues so there are no surprises once you’re retired.
• Travel: Many people plan to travel during retirement, but this can add a significant expense to your budget. Think about how often you plan to travel and what you’re willing to spend each year.
• Healthcare: People sometimes fail to think about healthcare costs when it comes to retirement planning, but they can be a significant portion of your spending. Fidelity estimates that an average retired couple may need about $315,000 for healthcare expenses during retirement.
• Taxes: Don’t forget about taxes during retirement. You may have a combination of taxable and tax-free income during retirement, but failing to account for taxes could create an unexpected shortfall.
• Inflation: You’ll also want to consider inflation as you plan your retirement budget. The amount you need to live on 20 years from now likely won’t be the same amount as today.
• Longevity: How long you’ll live is one of the most difficult questions to answer. Of course no one knows exactly, but if you have parents or grandparents that lived into their 90s, it may be an indication that you should plan for a longer than average life expectancy.

How to retire on less than $1 million

Once you have an idea of how much you plan to spend during retirement, you can figure out how much income you’ll need to support that spending. Income during retirement typically comes from a handful of sources.

• Pension (defined benefit plan): Traditional pension plans are on their way out and virtually non-existent for those early in their careers, but some retirees may still benefit from these plans. Pension plans typically pay retirees based on a formula that accounts for your salary and years of service.
• Social Security: Social Security payments are another aspect of retirement income that can help make up for a lack of retirement savings. The average Social Security check for a retired worker was $1,783.55 as of August 2024.
• Retirement savings: Retirement funds come from workplace retirement plans such as 401(k)s or 403(b)s, traditional and Roth IRAs and any other places you may have money saved like a taxable brokerage account.

If you’re lacking in the way of retirement funds, you’ll need to rely more on income from places like Social Security. It also may make sense to find a part-time job to help cover your expenses during retirement. Earning an extra $1,000 a month can make a big difference and can help you rely less on retirement savings.

When it comes to tapping your retirement savings, you’ll have a couple of options. You can make withdrawals using a method such as the 4 percent rule, which involves withdrawing 4 percent of your retirement funds and then adjusting for inflation each subsequent year for 30 years. For someone with $500,000 in retirement savings, this would result in an initial withdrawal of $20,000.

Another option is to turn your retirement savings into an annuity. Here’s how it works: You sign a contract with an insurance company that provides a stream of income in exchange for money paid into the annuity. You can purchase an annuity by depositing a lump sum or by making a series of premium payments over time. 

People often invest in annuities as part of their broader retirement strategy, and they’ve become more and more popular over the years because of their ability to provide income during retirement. The psychological allure of annuities has also attracted investors, as it’s kind of like receiving a regular paycheck.

Annuities can be complex, however, and may come with sizable fees. Be sure you understand an annuity’s terms before purchasing one. While they won’t make sense for everyone, annuities can help ensure that you won’t run out of money during retirement. 

Bottom line

Ultimately, whether you can retire on less than $1 million will largely depend on your spending needs during retirement and your remaining life expectancy. To be sure, $1 million may not be enough if you intend to spend lavishly. However, some retirees may be able to get by on $30,000 in income, in which case you may not need $1 million in order to retire comfortably. As your spending needs increase, you’ll need more income to cover additional costs. Building a detailed budget and understanding where your income will come from are both critical for any retirement plan.

— Bankrate’s Logan Jacoby contributed to an update of this article.