Achieving $1.5 million in retirement savings is possible. While that’s a lot of money, it’s well within reach of most income earners. As long as you start saving early — ideally in your 20s — and take advantage of market returns, you can reach $1.5 million in retirement savings with even modest contributions to your retirement account. The key question is: will that be enough? Is $1.5 million enough to retire at age 65 or should you plan on accelerating your savings or even delaying retirement? Here are five things to consider when asking that question.
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How much retirement income will you need?
A nest egg of $1.5 million might be more than enough to retire on, but it depends entirely on how much money you plan to spend. The more income you expect to replace, the more you will need to withdraw from your retirement account and the larger your retirement account will have to be.
As a general rule of thumb, financial experts suggest that you plan to withdraw between 60% and 80% of your pre-retirement income. So, for example, let’s say you earn $100,000 a year. In order to maintain your current standard of living, you should plan for a retirement account that can generate between $60,000 and $80,000 in income per year for the rest of your life.
This helps you decide how much you will need to keep in your portfolio. For example, let’s say you plan to retire at age 65. Let’s also assume that you overcome adversity and live another 40 years. After all, it’s better to overestimate than to underestimate when estimating your life expectancy. As a result, you’ll need a portfolio that can generate $80,000 a year for 40 years.
Now, that doesn’t mean you need $3.2 million in cash on hand. Your portfolio is not static, it will continue to grow over time. Instead, to live on $80,000 a year in retirement, you’ll need about $1.8 million saved by age 65. From there, growth and Social Security will fill in the gaps. On the other hand, if you cut it down to $60,000 a year, you only need $1.08 million in your portfolio.
Anyway, if we’re asking “will $1.5 million be enough for retirement”, the answer is… it depends. Yes, it can be a lot of money for a comfortable retirement, but it depends entirely on how much you’re going to pull out.
What are your expenses?
When thinking about retirement spending, it’s important to ask yourself exactly what kind of lifestyle you envision yourself leading. How are you going to spend your money? Where are you going to spend your money? What needs will you have and what kind of flexibility do you want? All of these will determine how much you need to withdraw each year. Some important issues to consider include:
Will you own your home or continue renting? Renters will need to advance these monthly payments indefinitely. Homeowners who have paid off their mortgage don’t have much in the way of regular payments, but they do need to set aside money for upkeep and upkeep. After all, you might not have to send the landlord a check, but boilers are still expensive to replace.
Travel and Entertainment
What kind of luxury do you want to enjoy? Do you want to spend your retirement traveling or are you happy just going to the movies on Saturday night? The more money you want to spend on entertainment, travel, and other luxuries in your retirement, the more money you’ll need to save.
location and taxes
Where you live matters. Living in a city can give you access to many of the things you love, but it will come at a much higher cost of living. Some states are much more tax-friendly than others, but that can come at the cost of not living where you want to. Also, be careful when making tax-based decisions. When a state claims to have low taxes, it usually means that there is no income tax and it makes up the difference through sales taxes. Depending on how you’ve structured your portfolio, this could increase your cost of living.
See how you want to balance your lifestyle and costs, and consider whether location can help with that.
The closer you get to retirement, the more seriously you should start taking your health. In part, that’s because healthcare will be one of your biggest long-term expenses, and if those costs are going to accelerate sooner, it’s best to know now. Make sure you have coverage for specific needs, such as dental insurance and possible long-term care insurance, and factor this into your budget.
When will you receive Social Security?
You can start getting Social Security at age 62 or age 70, and your choice makes a big difference. Starting in 2023, if you start getting Social Security at age 62, you can receive up to $2,572 in monthly benefits for the remainder of your retirement. If you wait until age 70, you could receive up to $4,555. At full retirement age (66 or 67, depending on when you were born), you can receive up to $3,627.
It is important to remember that this is not guaranteed. Social Security was created to pay more money to higher-income families; therefore, the more you earned during your working life, the more money you can get from Social Security in retirement. But the basic structure doesn’t change: the longer you wait, the more money you’ll get from this program.
If you retire at age 65 but can wait another five years before you get Social Security, you can nearly double your benefits. Calculate what your benefits will be based on your income and your retirement age and be sure to factor this into your planning.
Do you have significant assets?
One of the important elements of retirement planning is, essentially, backup planning.
In other words, what happens if the money in your account is not enough? What will you do if you’re celebrating your 90th birthday and your bills start to drop dangerously?
This is an important question because it tells you how much security you need to build into your retirement account. For families that have significant assets, they can serve as a backup plan. Selling your home or treasured memorabilia can be a bad, if not painful, move, but it can serve as a hedge against poverty in old age.
On the other hand, if you don’t have significant assets to fall back on, you should factor that into your retirement planning. In that case, you may want to increase your account further before retiring.
How is your portfolio growth structured?
Finally, it’s important to consider how your portfolio is structured. There are two main issues to consider when evaluating your portfolio. First, based on your investments, what kind of growth and risk do you expect from your portfolio? This informs your approach because the more growth your portfolio generates, the less principal you will need for retirement. But the more risk your portfolio is exposed to, the more money you’ll want to keep on hand or reinvest.
Second, do you plan to live on investment income or capital gains?
Capital gains are profits from the sale of an asset such as a stock. Selling assets for capital gains will generate retirement income for you, but it might mean dipping into your principal and cashing out a portion of your holdings.
On the other hand, some assets automatically generate income or interest payments. For example, bonds pay an interest rate, income shares pay dividends, and annuities are contracts that pay a fixed amount each year. The main thing about these assets is that they are durable. You don’t need to sell them to generate that money.
The more money you make from income-generating assets, the less you will draw out of your portfolio’s overall principal. For example, let’s say you manage to build a portfolio that generates $80,000 a year in combined dividend, interest, and annuity payments. In this case, the main thing is of secondary importance. Whatever the amount, that’s enough to retire on because you can live indefinitely on those assets.
It’s harder to build a strong collection of income assets. If you can pull it off, though, you can achieve your retirement dream: a self-sustaining portfolio.
You certainly can comfortably retire at age 65 with $1.5 million, but your ability to do so depends on how you want to live in retirement, how much you plan to spend, when you plan to claim Social Security, and how your portfolio is structured. Before making any big decisions, be sure to review your financial plan in detail.
retirement planning tips
Social Security plays a significant role in most retirement plans, and getting an accurate estimate of how much you can expect to collect can help you make more informed decisions about your future. SmartAsset’s Social Security Calculator can help you estimate your future benefits based on how much you earn and when you plan to retire.
Good financial advice can make all the difference in retirement planning, and finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three financial advisors that serve your area, and you can interview their advisors at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you reach your financial goals, start now.
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