If you had $2 million saved in an individual retirement account (IRA) by age 67, could you make it last the rest of your life? With some wise planning and investing, stretching a $2 million nest egg over several decades is entirely possible. A sensible approach could be to focus on budgeting prudently, balancing investment risk and return, and securing additional sources of income if needed. These moves could further boost your chances of not outliving your savings. Talk to a financial advisor today about securing your retirement.
Basics of Making IRA Savings Last
Making a $2 million IRA balance last for up to three decades involves considering several factors, only some of which are under your control. To start with something you can control, look first at how you can limit withdrawals from your IRA to a sustainable rate.
The often-cited 4% rule offers a baseline for a sustainable withdrawal rate. In your case, using it with a $2 million IRA would allow for $80,000 in withdrawals in the first year of retirement, with adjustments for inflation in the following years.
An annual income of $80,000 is likely enough to fund a comfortable, if not luxurious lifestyle, for most retirees. Data from the Federal Reserve Bank of St. Louis shows, on average, people ages 65 to 74 spend about $61,000 per year, while those 75 and older spend over $53,000 per year. But if you needed more than $80,000 to support your lifestyle, you could use a higher withdrawal rate or invest more aggressively to generate higher returns. Keep in mind, that you’ll also have Social Security benefits to rely upon, assuming you paid into the system throughout your career.
Concerning the investment approach, the goal is to earn solid returns while controlling risk. This will help you maintain purchasing power over time. Generally speaking, a diversified, 60/40 portfolio of stocks and bonds using low-fee index funds is a well-tested way to get market-matching growth without undue volatility. However, it’s only one of several paths you could take.
If you have other common retirement income sources like Social Security, pensions or part-time work, tapping them to pay expenses first can help you limit withdrawals from your savings. Preserving principal in your nest egg provides a cushion against possible negative events such as a market downturn, and increases the chances it will last the rest of your life.
A financial advisor can help you build a retirement income plan suited to your needs, including calculating how much you can afford to withdraw from your savings.
Potential Income Generation From a $2 Million IRA
Under current market conditions, a balanced portfolio of stocks, bonds and cash could potentially generate $100,000 or more annually starting at age 67. For instance, bonds presently yield around 5%. A portfolio consisting of $2 million in bonds could therefore provide $100,000 in income without touching any of the principal. Of course, bond yields could decline in the future, which could require you to withdraw some of the principal to maintain your desired level of income.
Diversifying by adding dividend stocks could further boost investment income, possibly allowing you to avoid withdrawing any principal if bond yields fall. Dividend stock prices may be more volatile than bonds, however, so this would add some risk. More aggressive growth investing could increase your portfolio’s growth rate, allowing you to withdraw even more than 4%, but it would further increase risk by adding volatility. This is where a financial advisor can potentially help.
Income annuities offer another item to consider. These provide an exceptionally low-risk way to secure monthly cash flow for as long as you live. However, fees are important considerations with annuities. Also, keep in mind that income from these insurance contracts is typically not indexed for inflation, so it will lose its purchasing power over time.
Combining all these options, you could invest your IRA in a blended portfolio of bonds, dividend stocks, index funds, growth stocks and annuities. The exact mix of investments you will use depends on your personal risk tolerance and income needs. But $2 million provides numerous alternatives that could support a comfortable lifestyle depending on how long you live.
Risks and Limitations
Despite the generally good position that you would be in with $2 million saved at age 67, potential pitfalls do exist. Primary risks that are hard to foresee with any precision include longevity risk – the chance that you’ll live particularly long and run out of money – as well as the risk of poor market returns.
Maintaining expense controls is also vital. If you start taking withdrawals at rates exceeding your portfolio’s returns, you will deplete the assets more quickly. Inflation, healthcare costs and taxes are also hard to predict but, if they rise rapidly, they will diminish your purchasing power.
Investment diversification, using insured income sources and being ready to cut expenses if necessary can help defend against the hazards. Generally, realistic planning around potential portfolio growth and prudent budgeting are key to maintaining the lifelong viability of your retirement savings. A financial advisor can help you plan and guard against these risks and others.
Bottom Line
Retiring with $2 million would potentially put you in a good position to fund even a fairly elevated lifestyle decades into the future. Reasonable withdrawal rates, balanced investing, supplemental income streams and conscious budgeting can maintain and extend the viability of your retirement savings even in the face of market fluctuations or extended longevity.
Retirement Planning Tips
- Consider meeting with a financial advisor to analyze your retirement income needs. 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.
- A quick and easy first step to evaluating the sufficiency of your retirement savings is to use SmartAsset’s retirement calculator. This free tool will help you estimate how much money you could have by the time you retire and whether it will cover your estimated spending needs.
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