Although 65 is the conventional retirement age, reaching that point with $2 million is no mean feat. This amount can generate investment and interest income to support you well in the decades to come. However, saving this amount takes effort. And it is crucial to distribute it correctly between the types of assets. Additionally, it is essential to anticipate the expenses you will encounter during your golden years, such as health costs and taxes. Here’s how to determine if $2 million is enough to retire at age 65.
A financial advisor can help you create a financial plan based on 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 that you rely on your principal earning 4% and plan to live on that amount. In this scenario, your $2 million nest egg brings in $80,000 in retirement income. Thus, you would receive $80,000 per year without drawing on the capital, which means that it would continue to generate this amount throughout retirement. Whether that’s enough for retirement depends on your expenses.
The Bureau of Labor Statistics reports that the average 65-year-old spends about $52,000 a year in retirement. Of course, your personal situation may dictate a different annual budget. However, if you fall near that average, you can retire on $80,000 a year, especially if you factor in Social Security. That said, it’s wise to write a budget to make sure you can afford to retire.
How to determine the amount you need to retire
Paying for retirement with $2 million requires a thorough financial plan. Consider the following when reviewing your finances:
Estimate your retirement costs
Your monthly expenses during retirement influence your ability to retire on $80,000 per year. Your lifestyle determines monthly expenses, so defining every bill or payment you’ll have in retirement is crucial.
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Life expectancy
Life expectancy is another essential part of retirement planning. For example, if you retire at age 60 and live to be 90, you will have a 30-year retirement. Because healthcare costs increase with age, they are an indispensable part of your budget, even with Medicare.
Retirement experts recommend designating 15% of your annual income to cover medical expenses. Thus, you would designate $12,000 per year for retirement health care.
Tax planning
Also, tax planning is a must. Although retirement means leaving the workforce, you will pay taxes on most income streams from 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. Similarly, you will pay capital gains taxes if you profit from the sale of stocks.
On the other hand, you can avoid taxes on retirement income by investing in a Roth IRA or Roth 401(k). These accounts use income on which you have already paid taxes during your career. Therefore, it is essential to know what account you are saving in and what types of taxes you will pay in retirement. Remember that you will also pay property taxes on your home even if you pay off your mortgage.
Estate planning
At 65 with $2 million, you think about your family and your 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 on from generation to generation and not have to take out a new mortgage on another home.
Estate planning can also help the beneficiaries of your 401(k) or Individual Retirement Account (IRA). Make sure the payees are up to date and the percentages added should be balanced, if necessary, to meet your family’s demand.
Identify retirement income streams
After drawing up an accurate picture of your expenses, it’s time to define your retirement income. A balanced retirement budget will incorporate income from several sources:
Retirement accounts
Your IRA, 401(k) or 403(b) is a solid foundation for your retirement fund. Over the course of your career, your portfolio will continue to reinvest your money and fuel its own growth as you contribute part of your salary. So if you expect your account to reach $1 million, that takes care of half your nest egg. Then you can diversify the other million dollars into the accounts listed below.
Annuities
An annuity is a contract from an insurance company providing for monthly distributions. You buy an annuity by paying periodically or in a lump sum. After you have fully funded the annuity, you receive a monthly check during retirement. For example, a $1 million annuity can bring in around $5,000 a month.
Whole life insurance
A whole life insurance policy has a balance that earns interest and provides a large payout to your beneficiaries after you die. You may receive distributions from the policy during retirement and pay normal income taxes. Whole life policies typically have an interest rate of around 2%, so you won’t receive enough income from this asset alone.
Bank accounts
The recent rise in inflation has pushed up interest rates, making high-yield savings accounts excellent assets. These accounts have interest rates of 4% and above and don’t involve risking your nest egg in volatile stocks.
Social Security
Social Security. Your Social Security income is affected by your work history. According to the Social Security Administration, the average worker who starts collecting benefits at age 65 receives $1,690 a month. However, deferring 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 start receiving them.
Conclusion
Retiring at age 65 seems like a typical goal, but it takes careful planning and enough nest egg to be successful. If you accumulate $2 million over your career, you can pay yourself $80,000 a year without touching your capital, which translates into a healthy monthly budget. Also, your Social Security will likely be 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 condition that requires expensive care, you may need to change your spending habits or your savings goal. In short, retiring well means executing a detailed plan even if you have a strong investment account.
Tips for retiring at 65 with $2 million
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Retiring at any age takes a lot of hard work and thought, and retiring at 65 is no exception. Your $2 million should provide you with enough returns to live on, so your investment choices are paramount. Fortunately, a financial advisor can help you make optimal investments that fit your retirement plan. Finding a qualified financial advisor doesn’t have to be a headache. SmartAsset’s free tool connects you with up to three financial advisors who serve your area, and you can interview your matching advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
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The right time for your retirement is less a question of specific age than a financial one. The following guide can help you determine if you are ready to retire.
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