$2 Million Will Last You This Long if You Retire at 55
It’s often said that a million dollars isn’t as much as it used to be – but how about $2 million? A retirement fund of that amount can provide $80,000 in annual income — without even touching the principal. While this amount may sound sufficient, you’ll contend with taxes, medical expenses and inflation during retirement. So, is $2 million enough to retire at 55 years old? Read on to see.
For help planning your own retirement, consider working with a financial advisor.
Is $2 Million Enough to Retire at 55?
A $2 million nest egg can provide $80,000 of annual income when the principal gives a return of 4%. This estimate is on the conservative side, making $80,000 a solid benchmark for retirement income with this sum of money.
The Bureau of Labor Statistics estimates the average 65-year-old spends about $52,000 annually in retirement. That said, retiring comfortably depends on your goals and expenses during your golden years. As a result, identifying your income and expenses is crucial for understanding if $2 million is enough for your retirement.
Determining How Much You Need to Retire
Leaving the workforce at 55 with $2 million in assets requires a financial plan. Consider these aspects of retirement planning to ensure you take a wise approach:
Estimate Your Costs in Retirement
Your ability to retire on $2 million depends on your expenses in retirement. Because lifestyle drives monthly expenses, your activities and hobbies may run up against your $80,000 annual income. This amount equates to $6,666 per month. If you want to spend a lot of time travelling abroad, for instance, you might need more monthly income to make ends meet.
Your life expectancy also plays a role in retirement plans. For example, retiring at 55 and living until 90 means a 35-year retirement. This factor goes hand in hand with healthcare costs, which can spike as you age and need more medical attention.
In addition, taxes can sneak up on you in retirement, even if your income is lower than during your working years. For instance, property taxes are a constant expense whether or not you’re still paying a mortgage.
Likewise, retirement generally doesn’t put an end to income taxes. Specifically, traditional IRAs and 401(k)s grow through pretax contributions, meaning the government takes its cut when you receive income later. On the other hand, paying taxes during your working years with a Roth IRA means more tax-free income during retirement.
There are other taxes to consider as well. For instance, selling stocks and bonds results in capital gains taxes, while interest accumulation in a bank account incurs standard income taxes.
Remember, retiring at 55 can mean waiting to withdraw money from your retirement accounts because the age rule for withdrawals is 59.5. However, if you have no other funds to provide income during retirement, you’ll take a 10% penalty for funds withdrawn during the first four years of retirement.
Furthermore, planning for healthcare costs is a must. It’s a good idea to allocate 15% of your income for medical costs every year.
Lastly, inflation means your expenses creep upward every year. As a result, your retirement income must keep up with the rising cost of living. It’s recommended to budget assuming a 3% inflation rate per year.
Pinpoint Retirement Income Streams
Once you’ve defined your expenses, you can move to income streams. You can receive retirement income from many sources:
Social Security. Fortunately, your savings won’t affect how much you receive from Social Security. Instead, your work history and retirement age affect your Social Security income. For instance, the average retiree receives $2,500 in Social Security if they start taking benefits at 65. That said, prolonging when you start receiving Social Security increases your monthly income. The timing of your Social Security will depend on when you need to supplement your other income streams.
Retirement accounts often serve as the bedrock of one’s retirement savings. For example, an individual retirement account (IRA) or employer-sponsored 401(k) invested in stocks grows faster than other investment types. As you near retirement age, it’s best to move more money into lower-risk, lower-rewards assets, such as bonds. Of course, the key is for your money to continue providing steady returns.
Annuities are contracts insurance companies sell guaranteeing retirement income. Generally, you purchase a policy (say, for a price of $1 million or $2 million) which then provides monthly income for the rest of your life.
Whole Life Insurance. A whole life insurance policy functions like a retirement account with a death benefit. Your account usually will grow at a rate of 2% or less. While this rate is likely less than what you need for $2 million to provide retirement income, a portion of your money in a whole life policy is a low-risk way to generate income and provide your dependents with a payout when you pass away.
Bank accounts. Namely, a high-yield savings account is the ideal bank account to provide retirement income because you can withdraw money at any age. In addition, today’s economic trends mean you can find a bank account that earns 4% interest, an excellent rate of return for an asset with virtually no risk.
Run the Numbers
Once you line up your income and expenses, it’s time to crunch some numbers. For example, you can calculate an $80,000 return for your $2 million retirement fund. As a result, your income at 55 will be $6,666 per month. Then, you’ll increase this amount by 3% this year to combat inflation. Plus, you’ll start collecting Social Security at 65 and estimate a $2,500 monthly benefit.
The numbers above retiring at 55 with $2 million means receiving $6,666 plus the cost of inflation from your own assets for ten years, then supplementing your income with Social Security. How realistic is the plan? It depends on your expenses. Living in a paid-off house can give you more flexibility in retirement. Likewise, planning fewer exotic vacations can help you keep your budget under control.
How to Boost Your Retirement Savings
Retiring at 55 with $2 million can be a steep goal. Fortunately, you can make faster progress toward your target savings amount with these strategies:
Postpone Social Security Benefits
You become eligible for Social Security payments at 62, but you’ll receive more the longer you wait. Specifically, your benefit increases by about 8% each year you delay collecting it. This tactic works up to the age of 70, when you’ll max out your Social Security benefit.
Take Advantage of Interest
Recent economic trends have driven up interest rates, meaning it’s an excellent time to put money into interest-bearing accounts. For example, there are savings accounts and certificates of deposit (CDs) with rates of 4% or higher. You’ll receive a healthy return on investment without risking a dime in the stock market.
Use Tax-Free Income Intentionally
Tax-free accounts, such as a Roth IRA or Roth 401(k), can provide income without ballooning your taxes every year. Most income types – from Social Security to interest from your bank account – will increase your federal tax burden. As a result, you can balance retirement income from these sources with tax-free income, which will pad your budget without making you jump into the next tax bracket. Tax-free income is a suitable supplement for taxable income because it keeps you in your current tax bracket.
How to Make Your Savings go Further in Retirement
Your lifestyle and financial habits can make the difference between living on the returns of a $2 million retirement fund and slowly but surely draining your retirement savings. Here’s how you can ensure your nest egg supports you throughout retirement.
Follow a Budget
Budgeting isn’t specifically for retirees but for anyone who wants to take control of their finances. That said, you can stretch your retirement savings by sticking to a spending plan that fits your lifestyle. You can still splurge, of course – any reasonable budget has an item for entertainment or treats – but the idea is that your spending goes according to plan. This way, you’ll live within your means and won’t need to dip into your savings.
Avoid High-Fee Annuities
Annuities provide reliable income, but every contract has a different fee structure. The fine print of an annuity can mean paying an exorbitant amount, so choosing an annuity with reasonable fees is crucial to getting your money’s worth. For example, a fixed-rate annuity usually has lower fees variable annuities require more management. In addition, modifying your policy through riders increases cost, so it’s best to keep your contract as uncomplicated as possible.
Prioritize Your Health
Maintaining your health as you age is critical because healthcare costs can skyrocket during retirement. Making healthy living a top priority will increase your quality of life and keep you from using more of your money for healthcare costs. For example, practicing preventative care through routine checkups and regular exercise means you’re less likely to be rushed to the emergency room.
Delay Retirement
If you’re concerned about your money lasting through retirement, working longer can help. You’ll likely improve your Social Security benefit by replacing low-earning years from the beginning of your career with high-earning years. Plus, each year you work is a year you leave your retirement fund alone and promote its growth.
Work Part-time
Nothing offsets retirement expenses like creating some work income. Putting ten or twenty hours per week into a part-time job can work wonders for your budget and help you leave your retirement account untouched.
Pay Off Your Mortgage
If you’re 55, you might see the finish line with your mortgage. While paying a lump sum to free yourself of a mortgage can be painful, it means ridding yourself of a monthly payment. Plus, you save money in the long run because you won’t pay any more interest on the balance. You’ll also have access to the full amount of equity in your home, which you can borrow against for home repairs or financial emergencies if necessary.
The Bottom Line
If you have multiple income streams, a detailed spending plan and keep extra expenses to a minimum, you can retire at 55 on $2 million. However, because each retiree’s circumstances are unique, it’s essential to define your income and expenses, then run the numbers to ensure retiring at 55 is realistic.
If the numbers don’t work out, you may need to tinker with your plan, perhaps moving the retirement age a few years back or reducing expenses. Working a few extra years and delaying Social Security can help bolster your financial situation. Therefore, the ideal retirement requires careful planning no matter what the age.
Retirement Planning Tips
A $2 million retirement fund can provide significant income, but it can be challenging to tell if it is enough for your situation. Fortunately, help from a financial advisor is easily accessible. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Interest income is generally lower risk and lower reward than other investment types. However, if you have modest expenses, this could be a safe route to generate enough income during retirement. Here’s how to tell how much interest $2 million pays monthly.
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