Reaching $1.5 million in retirement savings is doable. While this is a lot of money, it is well within reach for most incomes. As long as you start saving early—ideally in your 20s—and take advantage of market returns, you can hit $1.5 million in retirement savings with even modest contributions to your retirement account. The key question is, will it be enough? Is $1.5 million enough to retire at 65, or should you plan to accelerate your savings or even delay retirement? Here are five things to consider when asking that question.
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How much retirement income do you need?
A nest egg of $1.5 million may be more than enough to fall back on, but it all depends on how much money you plan to spend. The more income you expect to replace, the more you need to draw from your retirement account and the larger it needs to be.
As a general rule, financial experts suggest that you should plan to plan to withdraw between 60% and 80% of your early retirement income. For example, say you make $100,000 a year. To maintain your current standard of living, you should plan for a retirement account that can generate an income of between $60,000 and $80,000 per year for the rest of your life.
This will help you decide how much to keep in your portfolio. For example, let’s say you plan to retire at 65. Let’s also assume you want to beat the odds and live another 40 years. After all, it is better to overestimate than to underestimate when estimating your life expectancy. As a result, you need a portfolio that can generate $80,000 per year for 40 years.
Now, that doesn’t mean you need $3.2 million in cash on hand. Your portfolio is not static, it will continue to grow over time. Instead of living on $80,000 a year in retirement, you’ll need about $1.8 million saved by age 65. From there, growth and Social Security will fill in the gaps. On the other hand, if you trimmed it down to $60,000 a year, you would only be using $1.08 million in your portfolio.
Either way, if we ask “will $1.5 million be enough to retire,” the answer is…it depends. Yes, it can be a lot of money for a comfortable retirement, but it all depends on how much you want to withdraw.
What are your expenses?
When thinking about retirement expenses, it’s important to ask exactly what kind of lifestyle you envision yourself having. How will you spend your money? Where will you spend your money? What needs do you want and what kind of flexibility do you want? All of this will determine how much you need to withdraw each year. A few important questions to consider include:
Do you want to own your house or continue to rent it? Tenants will have to anticipate these monthly payments indefinitely. Owners who have paid off their mortgages don’t have much in the way of regular payments, but they will need to set aside money for maintenance and upkeep. You may not have to send the landlord a cheque, but boilers are still expensive to replace.
Travel and entertainment
What kind of luxury do you want to enjoy? Do you want to use your pension to travel or are you happy to just go to the cinema on a Saturday night? The more money you want to spend on entertainment, travel and other luxuries in your retirement, the more money you need to have saved.
Location and charges
Where you live matters. Living in a city can give you access to many of the things you love, but it will come with a much higher cost of living. Some states are much more tax friendly than others, but this may come at the cost of not living where you want. Also, be careful when it comes to making tax-based decisions. When a state claims to have low taxes, it often means that it has no income tax and makes up the difference through sales taxes. Depending on how you structured your portfolio, this could actually increase your cost of living.
Look at how you want to balance your lifestyle and costs and consider whether location can help with that.
The closer you get to retirement, the more seriously you should start taking your health. This is partly because health care will be one of your biggest long-term expenses, and if those costs will accelerate early, it’s best to know now. Make sure you have coverage for specific needs like dental insurance and potential long-term care insurance and factor that into your budget.
When will you take Social Security?
You can start taking Social Security as early as age 62 or as late as age 70, and that choice makes a big difference. Starting in 2023, if you start collecting Social Security at age 62, you can receive up to $2,572 in monthly benefits for the remainder of your retirement. If you wait until age 70, you can receive up to $4,555. At full retirement age (66 or 67, depending on when you were born), you can receive up to $3,627.
It is important to remember that this is not guaranteed. Social Security is built to pay higher-income households more money, so the more you earned during your working life, the more money you can receive from Social Security in retirement. But the basic structure does not change: the longer you wait, the more money you get from this program.
If you retire at age 65 but can wait five more years before collecting Social Security, you can nearly double your benefits. Calculate what your benefits will be based on your income and your retirement age and make sure you factor that into your planning.
Do you have significant assets?
One of the important elements of retirement planning is essentially backup planning.
To put it another way, what happens if the money in your account is not enough? What will you do if you celebrate your 90th birthday and all your accounts have started to sink dangerously low?
This is an important question because it tells you how much security you need to build into your retirement account. For households that have significant assets, these can serve as a backup plan. Selling your home or valuable souvenirs can be a poor, if not heartbreaking, option, but they can serve as a backstop against late-life poverty.
On the other hand, if you don’t have significant assets to fall back on, you should factor that into your retirement planning. If so, you may want to grow your account more before you retire.
How is your portfolio growth structured?
Finally, it is important to consider how your portfolio is structured. There are two primary questions to consider when evaluating your portfolio. First, based on your investments, what kind of growth and risk do you expect from your portfolio? This informs your approach because the more growth your portfolio generates, the less principal it will need when you retire. But the more risk your portfolio is exposed to, the more money you want to keep on hand or reinvest.
Second, do you plan to live off investment income or capital gains?
Capital gains are the profit that comes from selling an asset like a stock. Selling assets with capital gains will generate retirement income for you, but may mean dipping into your principal and drawing down some of your holdings.
On the other hand, some assets automatically generate income or interest payments. For example, bonds pay you interest, income stocks pay dividends, and annuities are contracts that pay a fixed amount each year. The most important thing about these assets is that they are durable. You don’t have to sell them to make money.
The more money you earn from income-generating assets, the less you will draw on your portfolio’s total principal. For example, let’s say you manage to build a portfolio that generates $80,000 a year in combined dividend, interest and annuity payments. In that case, the principal is of secondary importance. Regardless of the amount, this is enough to retire on because you can live off these assets indefinitely.
It is more difficult to build a strong collection of income assets. If you can do that, however, you can achieve the retirement dream: a self-sustaining portfolio.
You can certainly retire at age 65 for $1.5 million, but your ability to do so depends on how you want to live in retirement, how much you plan to spend, when you plan to claim social security and how your portfolio is structured. Before making any big decisions, be sure to review your financial plan in detail.
Tips for retirement planning
Social Security plays a significant role in most retirement plans, and getting an accurate estimate of how much you can expect to collect can help you make more informed decisions about your future. SmartAssets’ Social Security Calculator can help you estimate your future benefits based on how much you earn and when you plan to retire.
Good financial advice can make all the difference in retirement planning, and it doesn’t have to be difficult to find a financial adviser. SmartAsset’s free tool matches you with up to three financial advisors serving your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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