A $1.2 million superannuation balance is a substantial amount of money.
But what sort of retirement income could it fund?
The answer to that depends on how the money is invested and how quickly the retiree is comfortable drawing it down.
Image source: Getty Images
Start with the withdrawal rate
One simple way to think about retirement income is as a percentage of the starting balance.
If someone withdrew 4% from a $1.2 million portfolio in the first year, that would provide around $48,000.
A 5% withdrawal would increase the annual income to $60,000, while 6% would provide $72,000.
That gives us a fairly wide range.
I would not automatically choose the highest figure simply because the portfolio could support it in the first year. Retirement could last for decades, and the balance still needs to cope with market downturns, inflation, and future spending.
For me, the amount withdrawn would need to make sense alongside the investments held and the lifestyle I wanted.
Income does not have to come entirely from dividends
It is important to note that a $1.2 million portfolio doesn't necessarily have to generate a 5% dividend yield to provide $60,000 of annual income.
Retirement income can come from several places.
A portfolio might receive dividends and distributions from shares and exchange-traded funds (ETFs), interest from defensive assets, and cash from selling a small portion of investments when required.
That gives an investor more freedom when building the portfolio.
I would rather hold a mixture of investments with good long-term prospects than force the entire $1.2 million into high-yield assets purely to produce a particular income figure.
Growth still has a role
Even after retirement, I would want part of the portfolio invested for growth.
If someone retires in their 60s, their superannuation may still need to support them for another 30 years.
Over that period, living costs are likely to rise.
An income of $60,000 may feel comfortable today, but it will not have the same purchasing power decades from now.
Holding Australian and international shares gives the portfolio a chance to keep growing while withdrawals are being made.
Of course, share markets will not rise every year. That is why I would also want some cash or more defensive investments available for spending during weaker periods.
How much would I aim for?
If I had $1.2 million in superannuation, I would probably think about an initial income somewhere around $48,000 to $60,000 a year rather than immediately targeting $72,000.
That is not because $72,000 is impossible.
It simply places more pressure on the portfolio from the beginning, particularly if withdrawals later need to rise with inflation.
Someone with lower expenses may be happy to take much less, while another retiree may deliberately draw down their capital more quickly because they want to spend more in the early years of retirement.
There is no single number that will suit everyone.
Foolish takeaway
A $1.2 million superannuation balance could potentially provide a meaningful retirement income without requiring an unusually high investment return.
At withdrawal rates of 4% to 5%, it could provide roughly $48,000 to $60,000 in the first year.
For me, the bigger goal would be finding a level of income that supports the lifestyle I wanted while still giving the remaining balance a chance to keep working for the years ahead.
