Although 65 is a conventional retirement age, reaching this point with $2 million is quite an achievement. This sum can generate investment and interest income to support you well for decades to come. However, saving this amount requires effort. And allocating it correctly between asset types is crucial. Additionally, it’s important to anticipate the expenses you’ll encounter in your golden years, such as health care costs and taxes. Here’s how to decide if $2 million is enough to retire at age 65.
A financial advisor can help you put together a financial plan for your retirement goals and needs.
Is $2 million enough to retire at age 65?
Applying the 4% rule to $2 million can help you determine if this is an appropriate amount. The rule means you expect your principal to return 4% and plan to live on that amount. In this scenario, your $2 million nest egg returns $80,000 in retirement income. So you would receive $80,000 a year without drawing on the principal, meaning it would continue to generate this amount throughout retirement. Whether it is sufficient for retirement depends on your expenses.
The Bureau of Labor Statistics reports that the average 65-year-old spends about $52,000 annually on retirement. Of course, your individual circumstances may dictate a different annual budget. But if you fall close to this average, you could retire on $80,000 a year, especially when you factor in Social Security. That said, it’s wise to write a budget to ensure you can afford retirement.
How to decide how much you should retire
Paying for retirement with $2 million requires a thorough financial plan. Consider the following aspects when looking at your finances:
Calculate your costs in retirement
Your monthly expenses during retirement affect your ability to retire on $80,000 a year. Your lifestyle determines monthly expenses, so it’s critical to define each and every bill or payment you’ll have in retirement.
Expected life expectancy
Life expectancy is another critical element in retirement planning. For example, if you retire at 60 and live to 90, you have a 30-year pension. Because healthcare costs grow as you age, they are an indispensable item in your budget, even with Medicare.
Retirement experts recommend designating 15% of your annual income to cover medical expenses. So you’ll designate $12,000 a year for health care in retirement.
In addition, tax planning is a must. Although retirement means leaving the workforce, you’ll pay taxes on most income streams in your golden years, such as savings accounts, investment income, and Social Security. Specifically, traditional IRAs and 401(k)s will incur income taxes because they used pre-tax dollars from your working years. You also pay capital gains tax if you profit from the sale of shares.
On the other hand, you can prevent taxes on retirement income by investing in a Roth IRA or Roth 401(k). These accounts use the income you’ve already paid taxes on during your career. As a result, it is important to know which account you are saving in and which types of tax you have to pay as a pensioner. Remember that you also pay property tax on your home, even if you pay off your mortgage.
When you’re 65 with $2 million, you think about your family and assets that can be used in the future. An estate plan with your family where your home or vacation home is paid off can give your loved ones an advantage where those assets can be passed down generations and not have to start a new mortgage on another home.
Estate planning can also help with beneficiaries in your 401(k) or an Individual Retirement Account (IRA). Make sure the beneficiaries are up to date and the added percentages will be balanced if necessary to meet your family’s request.
Determine retirement income streams
Once you have an accurate picture of your expenses, it is time to define your retirement income. A balanced pension budget will incorporate income from several sources:
Your IRA, 401(k) or 403(b) is a solid base for your retirement fund. Over the course of your career, your portfolio will continue to reinvest your money and fuel its own growth while you contribute a portion of your paycheck. So if you plan for your account to grow to $1 million, that takes care of half of your nest egg. Then you can diversify the other $1 million into the accounts listed below.
An annuity is a contract from an insurance company that provides monthly distributions. You buy an annuity by paying periodically or in a lump sum. Once you have fully funded the annuity, you will receive a monthly check during retirement. For example, a $1 million annuity can pay about $5,000 a month.
Whole Life Insurance
A whole life insurance policy has a balance that earns interest and provides a large payment to your beneficiaries after you pass away. You can receive distributions from the policy during retirement and pay normal income tax. Whole life policies usually have an interest rate of around 2%, so you won’t get enough income from this asset alone.
The recent rise in inflation has raised interest rates, making high-yield savings accounts excellent assets. These accounts have interest rates of 4% and higher and do not involve risks to your nest egg in volatile stocks.
Social Security. Your Social Security income is affected by your work history. According to the Social Security Administration, the average worker who begins receiving benefits at age 65 receives $1,690 per month. But delaying Social Security payments increases your benefit by 8% each year, up to a maximum of age 70. Therefore, the amount you receive from Social Security payments depends on the age at which you begin collecting them.
Retiring at age 65 seems like a typical goal, but it takes careful planning and a sufficient nest egg to pull from. If you earn $2 million over your career, you can pay yourself $80,000 annually without touching your principal, which means a healthy monthly budget. Additionally, your Social Security will likely vary between $1,500 and $2,000, giving you more wiggle room. That said, everyone’s financial situation is unique. For example, if you have a chronic health condition that requires expensive care, you may need to adjust your spending habits or savings goals. Simply put, retiring well means executing a detailed plan even if you have a robust investment account.
Tips for retiring at 65 with $2 million
Retiring at any age takes hard work and consideration, and doing so at 65 is no exception. Your $2 million needs to provide enough return for you to live off of, so your investment choices are paramount. Fortunately, a financial advisor can help you make optimal investments that suit your retirement plan. Finding a qualified financial advisor doesn’t have to be a headache. 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.
Timing your retirement correctly is less about a certain age than it is about getting your ducks in a row financially. The following guide can help you decide if you are ready to retire.
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