While 65 is a conventional retirement age, reaching this point with $2 million is quite an achievement. This amount can generate investment and interest income to support you well for decades to come. However, saving this amount takes effort. And it is critical to distribute it appropriately across types of assets. In addition, it is essential to anticipate the expenses you will encounter during your golden years, such as health care 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 for your retirement goals and needs.
Is $2 Million Enough to Retire at Age 65?
Applying the 4% rule to $2 million will help you determine if this is an appropriate amount. The rule means that you count on getting your principal back at 4% and you want to live off that amount. In this scenario, your $2 million nest egg brings in $80,000 in retirement income. So you would receive $80,000 a year without using the principal, meaning it would continue to generate this amount in your retirement. Whether it’s enough to retire depends on your expenses.
The Bureau of Labor Statistics reports that the average 65-year-old spends about $52,000 annually on retirement. It is of course possible that your individual circumstances prescribe a different annual budget. However, if you get 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 prepare a budget to ensure you can afford your retirement.
How to determine how much you need to retire
Paying for $2 million in retirement requires a thorough financial plan. Consider the following aspects when looking at your finances:
Estimate your costs in retirement
Your monthly expenses during retirement affect your ability to retire at $80,000 per year. Your lifestyle determines monthly expenses, so it’s critical to define any bill or payment you’ll have in retirement.
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Life expectancy is another crucial element in retirement planning. For example, if you retire at age 60 and live to age 90, you will have a 30-year pension. Because health care costs grow as you age, they are an indispensable item in your budget and so is Medicare.
Retirement experts recommend designating 15% of your annual income to cover medical expenses. So you would allocate $12,000 a year for health care in retirement.
In addition, tax planning is a must. While retirement means leaving the workforce, in your golden years you pay taxes on most income streams, such as savings accounts, investment income, and Social Security. Specifically, traditional IRAs and 401(k)s will pay income tax because they used pre-tax dollars from your working years. Similarly, you pay capital gains tax if you profit from the sale of shares.
On the other hand, you can avoid taxes on retirement income by investing in a Roth IRA or Roth 401(k). These accounts use the income that you have already paid taxes on during your career. That’s why it’s vital to know what account you’re saving into and what types of taxes you’ll pay when you retire. Don’t forget that you also pay property taxes on your home, even if you pay off your mortgage.
Real estate planning
At age 65 with $2 million, you think of your family and your assets that can be used in the future. An estate plan with your family that pays off your home or vacation home can put your loved ones in favor, where those assets can be passed down through 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 should be balanced if necessary to meet your family’s request.
Locate retirement income streams
After getting an accurate picture of your expenses, it’s time to define your retirement income. A balanced pension budget includes income from various sources:
Your IRA, 401(k) or 403(b) is a solid foundation for your retirement fund. Throughout your career, your portfolio will continue to reinvest your money and drive its own growth as you contribute a portion of your salary. So if you plan on growing your account to $1 million, that will take care of half your nest egg. You can then diversify the other $1 million into the accounts below.
An annuity is a contract from an insurance company that provides monthly benefits. You buy an annuity by paying periodically or in one go. After you have fully funded the annuity, you will receive a monthly check during your retirement. For example, a $1 million annuity may pay about $5,000 per month.
Whole life insurance
A whole life insurance policy has a balance that accrues interest and provides a large payment to your beneficiaries after you die. You can receive benefits from the policy during your retirement and pay normal income tax. Whole life insurance usually has an interest rate of around 2%, so you won’t receive enough income from this asset alone.
The recent rise in inflation has rai
sed interest rates, making high-yield savings accounts excellent assets. These accounts have interest rates of 4% and above and you don’t have to risk your nest egg in volatile stocks.
Social Security. Your Social Security income is affected by your employment history. According to the Social Security Administration, the average worker who begins collecting benefits at age 65 receives $1,690 per month. However, deferring Social Security increases your benefits by 8% each year, up to a maximum of 70 years. Therefore, the amount you receive from Social Security benefits depends on the age at which you start collecting them.
It boils down
Retiring at age 65 seems like a typical goal, but it takes careful planning and a nest egg enough to pull it off. If you accrue $2 million during your career, you can pay yourself $80,000 annually without touching your principal, which translates into a healthy monthly budget. In addition, your Social Security will likely be between $1,500 and $2,000, giving you more wiggle room. That said, everyone’s financial circumstances are unique. For example, if you have a chronic condition that requires expensive care, you may need to adjust your spending habits or savings goal. In short, retiring well means executing a detailed plan, even if you have a solid investment account.
Tips to Retire at 65 with $2 Million
Retiring at any age requires hard work and deliberation, and this at age 65 is no exception. Your $2 million should give you 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 pairs you with up to three financial advisors serving your area, and you can interview your advisor matches 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, get started now.
Timing your retirement correctly isn’t so much about a specific age as it is about getting your ducks in order financially. The following guide can help you determine if you are ready to retire.
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