You will probably invest your retirement funds, not just store cash under the mattress. This leads to another common solution: Use only the interest distributions, to preserve principal. Assuming Mr. and Mrs. Retiree receive a net return of 4 percent every year in retirement and peel this off as income, they will earn $40,000 of annual income on a $1 million nest egg.

Another option is to combine some interest with the original linear paydown strategy. If Mr. and Mrs. Retiree were to do so, they'd enjoy $70,752 annually. They could die right on time, after year 20, with zero dollars remaining.

2. Inflation

The number 1 million has long had an aura about it. To many people, $1 million sounds like a sexy fortune that can cure all worries. Others, however, recognize that $1 million just isn't what it used to be. In determining when you should retire, keep in mind the wealth-eroding nature of inflation.

The value of $1 million in 1913, when the federal income tax was permanently enacted, would be equivalent to $25.8 million in 2019 dollars. The spending power of $1 million in 1945, when World War II ended, amounted to $14.2 million in 2019 dollars. By 1981, when the first millennial was born, the spending power of $1 million had fallen to $2.8 million in 2019 dollars.

If an employee retires with $1 million this year, at the age of 65, and inflation averages 3 percent, that $1 million will feel like just $744,000 in 2039, when that retiree is 85.

3. Uncle Sam

Of course, another important wealth-eroding factor to consider is income taxes. Once you're over the age of 59.5, you can take $1 million out of a Roth IRA without federal income tax consequences. Alternatively, if you keep your $1 million retirement savings in a non-qualified brokerage account and try to live off of only the interest, taxes could reduce your annual take-home income to $28,000.

4. The Markets

One more wealth-eroding factor to think about is, of course, the markets. When John Pierpont Morgan was asked what he expected the stock market to do, he famously answered, "It will fluctuate." These fluctuations can wreak havoc on your nest egg, or can help modest funds grow to support a golden retirement.

Evaluating the impact of markets on retirement savings leads to a concept known as the sequence of returns. If the portfolios of Mr. Retiree and Mrs. Retiree were to average the same rate of return during retirement, but Mr. Retiree experienced bear markets in the early years of distribution whereas Mrs. Retiree experienced bull markets during those years, his money would be at risk of depletion far earlier than hers.

This is where averages can be somewhat misleading. Note the classic example of an investor with $1 million losing 50 percent in year 1 and gaining 50 percent in year 2. In that scenario, the portfolio's average annual return is 0 percent, but $250,000 is missing at the end of the second year. This is where distributions can make an investment more fragile.

So, how long will $1 million last in retirement? I don't know, you don't know, nor does anyone else (unless the $1 million is held in an annuity with a lifetime benefit period). In addition to the factors I've explored, many other issues may affect the longevity of $1 million—including costs of housing, food, insurance, transportation, vacations, legacy goals, dependents, additional income or financial resources, long-term care, and the ultimate risk/reward multiplier: life expectancy.

Everyone considering their retirement time horizon should be aware that proactive financial planning can mitigate risks and potentially make $1 million last longer. When I'm talking to new clients, I make this part of the conversation a call to action. I encourage them to learn more, by subscribing to my podcast series or by reading my book.

Bryan Kuderna, CFP, RICP, LUTCF, is the founder of Kuderna Financial and the author of Millennial Millionaire — A Guide to Become a Millionaire by 30. He is a member of the Million Dollar Round Table.

From: ThinkAdvisor