Is it possible to retire on $2.5 million at age 55?

With $2.5 million in savings, most people can probably retire at 55. However, the final answer depends on the interplay of various factors. These include your health, your expected retirement lifestyle and expenses, and how you invest your nest egg. Some factors are predictable or controllable, such as lifestyle and investment strategy choices. Other items, such as health and life expectancy, are less so.

A financial advisor can help you devise a viable retirement strategy.

Is it possible to retire on $2.5 million at age 55?

Retiring at 55 with $2.5 million is certainly feasible. This is evident from the fact that the vast majority of people make far more money than they would have if they quit their jobs. Only about 1 in 10 retirees have saved $1 million, according to the Federal Reserve’s Consumer Finance Survey. If more than 90% of people can retire well below her $2.5 million, so be it.

A $2.5 million nest egg has the potential to generate $100,000 in annual revenue if the account is utilized with the widely quoted sustainable withdrawal rate of 4%. This rule predicts that if you withdraw that percentage each year, the nest egg will last at least 30 years.

Is your income sufficient?

An annual income of $100,000 is well above the $60,944 average annual income for those aged 55 to 64 who are still working. Also, many retirement planners suggest using his 70% of his pre-retirement income as a starting point when budgeting for retirement spending. 70% of $60,944 is $42,661. With that in mind, $100,000 a year could be more than enough income for the typical single retiree or married couple. $100,000 isn’t far off the mark, even using her 90% replacement rate figure, which is at the high end of the range used by retirement planners.

Using a safe withdrawal rate is not the only strategy. Retirees can earn income by investing in fixed-income securities, dividend-yielding stocks, and annuities. These income-oriented investment strategies may be pursued individually or in combination and yield annual yields of 4% or more. If this approach succeeds, retirees will be able to maintain a lifestyle without withdrawing from their core nest egg, which can last indefinitely and leave a financial legacy for heirs and philanthropy. It is possible.

If you are ready to be matched with a local advisor to help you reach your financial goals, get started now.

tax accounting

Taxes are a difficult factor to predict and their importance varies largely by location and income source. For example, 8 states have no income tax, plus he is not taxed on retirement income in 7 states.

California, the state with the largest population, taxes retiree income, including retirement account withdrawals, as ordinary income. Her SmartAsset Calculator for California Retirement Taxes shows that a single person born in 1968 pays her $5,520 in state income taxes on her $100,000 taxable income in California.

Depending on your source of income, federal income tax may be another portion. For example, withdrawals from Roth IRAs are generally not subject to federal income tax. Investment income and withdrawals from retirement accounts are not subject to payroll tax. However, your $100,000 withdrawal and investment income could be owed a long-term capital gains tax of 15% or $15,000.

In this simplified hypothetical example, the combined effects of state and federal taxes on a California retiree with $100,000 in retirement income would result in an after-tax income of $79,480. Deductions and deductions could increase the after-tax income of most retirees. The unadjusted remainder is well above her 70% of the standard replacement income for one retiree, but may well be well below the couple’s needs.

What could go wrong?

Healthcare costs are a difficult factor to quantify in advance and can alter these results. A study by the Institute for Employee Benefits found that her 65-year-old couple, who bear the cost of typical prescription drugs, would need $318,000 to ensure 90% of her retirement medical expenses are covered. of savings is required.

If you set aside $338,000 out of $2.5 million to cover medical expenses, the remaining $2,182,000 you can safely withdraw is only $87,280 before tax. And this hypothetical example doesn’t include medical expenses for ages 55-65. Given that Medicare coverage won’t be available until she’s 65, using private health insurance or other resources to pay for 10 years of medical care is a pocket cost above that level.

Rules governing withdrawals from tax-efficient retirement accounts can also pose problems. Until the age of 59.5, most people withdraw from most types of accounts will have to pay an additional her 10% fine as well as unpaid income tax. This reduces the spending power of your withdrawal until you reach your cutoff age.

Another potential problem, inflation, reduces the purchasing power of retirees’ income. For example, if inflation stays at 2%, the Federal Reserve policymaker’s target, in the first year he has a purchasing power of $100,000, but in the second year he has $98,000. at $96,040, and so on.

However, this hypothetical inflation example does not account for all factors. For example, when inflation rises, interest rates often rise. This could increase income from portfolios of interest-bearing investments about as fast as inflation reduces purchasing power.

Finally, age 62 is the youngest age most people are eligible for social security benefits. Social Security payments will average $1,827 per month in 2023 and will go a long way toward paying for living expenses in retirement. The need to wait until monthly social security checks are certain is one of the biggest reasons why more and more people aren’t retiring at age 55.

Conclusion

A retirement account containing $2.5 million will probably provide a safe retirement fund for most retirees. Whether it works for you depends on how much you plan to spend in retirement, what investment strategy you choose, and a number of important and hard-to-control factors such as future health care costs and life expectancy. However, given that this is far more than most people retire at any age, a $2.5 million nest egg is a strong indicator that he can confidently retire at 55.

retirement planning tips

Uncertainty about the future combined with a variety of potential strategies can make it difficult to come up with an effective retirement plan without the help of a financial advisor. SmartAsset’s free tool matches you with up to three financial advisors serving your area. You can interview Advisor Matching for free to determine which advisor is right for you. If you’re ready to find an advisor who can help you reach your financial goals, get started now.
Even if you don’t know exactly what will happen between now and retirement, SmartAsset’s Retirement Calculator can help you make reasonable predictions. To get started, enter information such as your address, income, expected age to start Social Security benefits, and current monthly savings. Calculators tell you how much income you’ll likely need after retirement, how much you’ll contribute to Social Security, and how much you’ll need to save before you quit your job.

The post Can You Retire With $2.5 Million At 55? First appeared on the SmartAsset blog.

Source link