Can You Retire Comfortably on $1 Million in Savings?

How much are you hoping to save for retirement? Many investors arbitrarily aim for a million bucks, liking the sound of the big round number even if it's not the head-turning amount of money it used to be.

The question's premise, however, looks past a far more important detail. That is, how much retirement income do you need your savings to generate when that time comes?

The best way to answer the overarching question, then, is by laying out what's possible, using the seven-figure sum in question for our hypothetical retirement nest egg.

Best fits for a multigoal framework

While the ultimate end goal for your retirement savings may be to fund a nice retirement, you'll actually need your money to simultaneously accomplish three different things once you stop contributing to your retirement account and begin withdrawing money from it. These are:

1. Generate immediate, reliable income.
2. Grow income at a pace that at least keeps up with inflation.
3. Produce capital appreciation that can be converted into income-producing assets at a later time.

Most investments can achieve at least one of these goals, and some may even meet two. It's unlikely any holding will do all three, however. That means you'll need a range of different kinds of holdings.

With that as the backdrop, here's a rundown of different categories of holdings and the sort of income a smartly allocated $1 million portfolio of all of them can realistically produce both right now and into the foreseeable future.

1. Bonds, for immediate, reliable income

Using the Vanguard Total Bond Market ETF (NASDAQ: BND) as a proxy for a basket of investment-grade debt, these mostly government-backed bonds are currently paying interest at a rate of 4.2%. Allocating 40% of your $1 million retirement fund to this sort of position would generate about $16,800 worth of taxable interest income per year.

2. Dividend stocks, for income growth

The downside of bonds is their lack of increased interest payments over time. That's not the case with most quality dividend stocks. Indeed, you can and should own stocks with a track record of dividend growth, like the ones found in the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD). These include defense contractor Lockheed Martin, Verizon, Coca-Cola, and 97 other names that make up the Dow Jones U.S. Dividend 100 Index, which prioritizes a combination of dividend growth and attractive valuations.

With its recent trailing dividend yield of just under 3.5%, a $400,000 position (another 40% of your retirement savings) in SCHD would yield roughly $14,000 in dividend income per year. That's less than you'd get with bonds, but SCHD's annual per-share payment has improved an average of 9% per year just since 2020. Assuming it maintains this pace, five years from now the annualized payout would exceed $21,000.

3. Growth stocks, for growth as well as for dividends

Finally, while your personal priority in retirement may be squeezing income out of your savings, you'll also want to achieve at least some degree of growth just to make sure your portfolio lasts as long as you need it to while you're drawing from it. The good news is you don't need to make a massive commitment to growth alone and forego dividends. Several growth names also pay dividends, like Microsoft, Broadcom, and Qualcomm.

These names don't boast huge dividend yields, mind you; their chief purpose is still growth. The Vanguard Dividend Appreciation ETF (NYSEMKT: VIG) that holds all three aforementioned tickers -- plus a bunch of others like them -- only boasts a trailing yield of just over 1.5%. That's still solid for the overall upside you're plugging into, though.

Allocating 20% of your $1 million retirement portfolio ($200,000) to these sorts of stocks would only produce a little more than $3,000 worth of dividend income per year. Just remember, this number would likely grow about as much as this position achieves capital appreciation. As time marches on, you'd probably want to use these gains to add higher-yielding stocks and even more bonds.

Image source: Getty Images.

So what's the final yearly tally? With our 40%/40%/20% portfolio above, our retirement savings would produce just under $34,000 worth of income per year right out of the gate, with decent income growth likely for the indefinite future. That's not huge, but it's not terrible either. Most important, that's roughly what most investors can expect when they're assembling a portfolio that's safe enough to let them sleep at night in retirement.

Of course, even if the threat of decreased payments is a very real one, most retirees will also be getting at least some Social Security benefits.

Only a rough starting point for what should be a specific plan

This is just one allocation model, of course. Dialing back the risk would net you less income and also raise the likelihood of outliving your savings, just because the assets you're leaving in your portfolio aren't achieving much net growth. Being willing to take on more risk, conversely, could get you more income -- a lot more, in fact -- if you can stomach owning lower-quality bonds and/or inconsistent income, and if you're OK with the possibility that you may not be able to take as much cash out of your retirement account while it's down due to a bear market.

If you're just looking to make a rough-but-realistic mental plan for your retirement savings, though, an effective average income yield between 3.5% and 4% of your holdings would be a fair figure to start with right now.

But even that seemingly narrow range isn't actually all that narrow in the long run. At the lower end of that range (3.5%), it's possible the entirety of your retirement capital could remain intact indefinitely, offering you income growth that matches inflation for as long as you need it, then allowing you to pass along a big chunk of change to someone when you're gone. At 4%, the so-called 4% rule kicks in, which also offers you ever-rising retirement income, yet all but guarantees you'll fully deplete a basic 50% bonds/50% stocks portfolio after about 30 years.

The point is even a "safe" retirement portfolio should be optimized carefully. The nickels and dimes can and do add up over time.

James Brumley has positions in Coca-Cola. The Motley Fool has positions in and recommends Microsoft, Qualcomm, Vanguard Dividend Appreciation ETF, and Vanguard Total Bond Market ETF. The Motley Fool recommends Broadcom, Lockheed Martin, and Verizon Communications. The Motley Fool has a disclosure policy.