Retiring at 50 is a lofty goal that gives you plenty of time to pursue all the projects you couldn’t get to in your career and make memories with friends and family. However, leaving the workforce 12 years before you qualify for Social Security is a financial challenge. While $5 million can provide an excellent investment income, planning is still critical because your expenses in retirement can be unpredictable. From medical bills to inflation, you’ll need to keep up with the cost of living during your golden years. Here’s how to know if $5 million is enough to retire at 50.
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Is $5 Million Enough to Retire at 50?
A $5 million nest egg can provide $200,000 of annual income when the principal gives a return of 4%. This estimate is on the conservative side, making $200,000 a solid benchmark for calculating your retirement income versus expenses.
Data from the Bureau of Labor Statistics indicates the average 65-year-old spends about $52,000 annually in retirement. While this figure is far beneath the income you’d receive from a $5 million retirement fund, retiring comfortably depends on your pursuits and expenses. Therefore, outlining your income and expenses is vital when calculating the feasibility of retiring on $5 million.
How to Determine How Much You Need to Retire
Drawing retirement income from $5 million means having a solid financial plan. Here’s what to remember while planning your third act:
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Estimate Your Costs in Retirement
Your expenses in retirement determine your ability to live on a specific income. Your lifestyle will influence monthly expenses, meaning your monthly income will constrain what you can do. For example, $200,000 of annual income equals $16,666 per month. This figure gives you plenty of room to include treats and excursions in your budget. For instance, a two-week vacation to Japan would cost $3,160 for a couple, according to Budgetyourtrip.com. That’s less than a quarter of your monthly income, meaning travel will generally be affordable.
Your life expectancy is also a significant component of your retirement plan. For example, retiring at 50 and living until 90 means a 40-year retirement. Because healthcare costs usually increase as you age, you must factor in medical expenses to your plan. It’s recommended to allocate 15% of your annual income for medical expenses. In this case, that means setting aside $30,000 annually.
Likewise, taxes don’t go away when you retire. Regardless of your income during your career, you’ll still owe income taxes and property taxes after you retire. That said, you can bypass income taxes if you saved primarily in a Roth IRA or Roth 401(k).
On the other hand, traditional IRAs and 401(k)s will incur income taxes because they use pre-tax dollars. Furthermore, if you have numerous taxable accounts, you might be subject to various tax rates. For example, you’ll incur capital gains taxes when selling stocks you’ve held for over a year. Therefore, understanding your account type is essential to calculating how taxes will impact your income.
That said, you won’t be able to touch your conventional retirement accounts until age 59 ½ due to federal law. In other words, the government will levy a 10% penalty on withdrawals from 401(k), IRA, or 403(b) before age 59 ½. As a result, you’ll need a portion of your $5 million in a more accessible account. For instance, there are no withdrawal penalties on income from a savings or brokerage account; you’ll only pay income taxes and capital gains taxes, respectively.
Finally, inflation is a pesky constant that gradually increases the cost of living. Therefore, it’s wise to increase your budget by 3% annually to account for inflation.
Pinpoint Retirement Income Streams
Then, you can calculate your retirement income. Fortunately, you can withdraw income from multiple sources, including the following:
Retirement accounts. For example, an IRA or 401(k) is a key part of your calculations. A portfolio with a $3 million principal averaging a 5% return can provide $150,000 of income per year. Spreading your remaining $2 million across other assets will help you diversify and draw income before age 59 ½ without penalty.
Social Security. Your work history and retirement age affect your Social Security income. According to the Social Security Administration, the average worker collects $1,320 monthly in Social Security if they start taking benefits at 62. Prolonging your benefits increases your income by 8% per year. So, the typical Social Security beneficiary can receive 64% more income by waiting until 70 compared to claiming at 62. However, while maximizing your benefit sounds nice, what’s most important is meshing your benefit with your other income sources.
Annuities. You can purchase an annuity from an insurance company to receive guaranteed monthly income for the rest of your life. For example, a $1 million annuity can provide $4,700 or more per month, but conditions vary based on age and the company you choose.
Whole life insurance. A whole life insurance policy functions like a savings account that pays a sum to your beneficiaries when you pass away. Typically, the growth rate of these policies is 2% or less. Therefore, you can draw money from your policy at any time – just remember, you’ll pay standard income taxes on the funds.
Bank accounts. The current bout of inflation has increased interest rates, meaning high-yield savings accounts are excellent savings vehicles for retirees. These accounts don’t have early withdrawal penalties and can provide returns of 4%. So, you’ll receive sufficient income for the 4% rule and don’t have to risk your money in the stock market.
Run the Numbers
Once you line up your income and expenses, you can crunch the numbers. For example, say you have $3 million in an IRA, $1 million in a brokerage account, and $1 million in high-yield savings accounts and certificates of deposit (CDs). You can’t touch your IRA money for the first nine and a half years of retirement. So, you’ll need to use your brokerage and bank account money until then. In addition, you’ll supplement your income further by taking Social Security at age 62. Therefore, the first nine years of retirement will require a tighter budget.
You have $2 million between your two accessible accounts. Assuming a 4% return means $80,000 of annual income. So, your monthly income at 50 will be $6,666. You’ll increase this number by 3% annually to account for inflation. Then, once you hit age 59 ½ , your income will more than double, reaching $200,000 annually, thanks to withdrawals from your IRA.
Therefore, in the example above, you must have less than $6,666 of monthly expenses during your first nine and a half years of retirement to retire at 50. Of course, you can allocate less money into your IRA to make the first nine and a half years more comfortable or work part-time to make up the gap. However, leaving more of your funds untouched in an IRA for almost a decade will provide more income later.
How to Boost Your Retirement Income
Five million dollars can provide a hefty investment income. However, if you’re having trouble making your budget work, you can boost your income in these ways:
Delay Social Security Benefits
While eligibility for Social Security starts at 62, immediately taking it lowers your potential income. Instead, you can increase your benefit amount by 8% per year. Therefore, it’s vital to start collecting Social Security at a strategic point that supplements your other retirement income.
Get a Better Interest Rate
Interest rates are the highest they’ve been in decades. Therefore, assets with virtually no risk – such as certificates of deposit (CDs) and savings accounts – are viable investment vehicles. If you’re earning less than 3% with your current accounts, you should be able to find a higher-yielding option quickly.
Understand Your Income Tax Implications
Roth IRAs and Roth 401(k)s provide income during retirement without incurring taxes. This advantage means you can draw funds from these accounts without jumping into the next tax bracket. So, using them at the right time is key.
Retiring at 50 gives you decades to enjoy with your career behind you, and $5 million is a sizable sum to do so. While the first nine and a half years might be challenging because of the lack of access to your retirement accounts, you can diversify in multiple income streams to provide yourself with an income of $80,000 or more for your first decade of retirement. Once you hit 59 ½, you’ll have around $200,000 of annual income and can take Social Security at 62 to boost your income further. That said, your circumstances are unique, meaning you’ll need to estimate your retirement expenses as accurately as possible.
Tips for Retiring at 50 With $5 Million
Allocating $5 million among asset types can be confusing. Should you dump it all into a brokerage account so you can access it at any age? Or are the tax advantages of a 401(k) worth it? 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 interview your advisor matches at no cost 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.
Saving $5 million indicates a certain amount of earning power. If you receive compensation from an employer offering a 401(k), you should look at 401(k) plan rules for highly compensated employees.
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