With $2.5 million in cash, $500,000 in an IRA and average Social Security benefits, someone who’s 67 is likely in a pretty good spot for retirement. However, retiring comfortably involves more than financial resources. It also requires balancing income and expenses. With that in mind, it may be necessary to reduce lifestyle costs or invest to generate more income if you want to retire immediately.
Do you have questions about saving and planning for retirement? Speak with a financial advisor today.
Retirement Planning Fundamentals
Retirement planning involves estimating expenses and calculating likely income. Then you can decide if you have enough assets to cover costs. If the numbers don’t quite add up, there are various strategies to make ends meet by increasing income, reducing costs or both.
The most significant costs for many retirees include housing, healthcare, food and travel. Reducing costs in retirement may involve deciding to downsize or move to a less costly location. Possible income sources include Social Security benefits, retirement account withdrawals, investment earnings, pension benefits and annuities payments.
Can You Retire?
Someone who has $2.5 million in cash and $500,000 in an IRA at age 67 can be in a good spot to retire and live securely, provided they plan accordingly. Assuming they receive the Sep. 2023 average monthly Social Security benefit of $1,793 a month, earn a modest 2% annual return on their cash reserve by investing in government securities and, lastly, withdraw using the 4% rule from their IRA, here’s how their annual income could look:
- Social Security Benefits: $21,516
- IRA Withdrawals: $20,000 (4% of $500,000)
- Return on Cash Savings: $50,000 (2% of $2.5 million)
That comes out to $91,516 in annual income. With a paid-off home and no mortgage, average healthcare costs and modest living expenses of, say, $50,000 per year, this person could feasibly retire. In fact, they may not need to draw down much of their cash principal if they can build a plan to have Social Security, IRA withdrawals and interest income cover their annual costs.
Bryan M. Kuderna, CFP®, founder of the Kuderna Financial Team, highlights a strategy for those with large cash reserves that helps make the most of Roth retirement accounts.
“With significant cash, I would suggest converting some or all of their IRA to a Roth over time, while in a low tax bracket with only Social Security income,” Kuderna said to SmartAsset. “The income tax owed on the conversion should be paid from cash, not IRA assets.”
Substantial cash reserves can also provide security against stock market volatility, but may leave it open to the effects of inflation. So, what if you’d still like to invest, but are looking for a method of doing so that accounts for tax efficiency?
Nathaniel M. Donohue, CFP®, a partner at Consilo Wealth Advisors, recommends that households with significant taxable assets take a look at direct indexing as a tax strategy.
“Rather than purchasing a single index fund or ETF to invest in an index, direct indexing allows investors to purchase 300-500 individual stocks that mirror the risk/return profile of the index,” Donohue explains. “This provides hundreds of ticker symbols to harvest losses from, rather than a single index fund or ETF. In a year when the entire index is positive, there could be several, if not dozens, of individual stocks that are at a loss. Direct indexing allows investors to take advantage of [tax] loss harvesting that index fund/ETF investors simply walk past.”
Ways to Extend Your Retirement Longevity by Reducing Expenses
To help your retirement savings last longer, there are a number of strategies you can implement. Here are a few examples:
- Downsize to a smaller, cheaper home: This cuts housing costs including utilities, taxes and maintenance.
- Move to an area with a lower cost-of-living: Housing represents the single largest item in most household budgets. It also varies the most by location, so you can bring this down by moving to a cheaper city or state.
- Take advantage of senior discounts: There are tons of these offers available if you look for them. You can find them on things like travel, groceries, dining, entertainment and more.
With $2.5 million in cash and $500,000 in an IRA, this 67-year-old appears to be in a good place to retire. However, forecasts like these involve a number of assumptions, some of which may not pan out as expected, and also may not align with your personal arrangements.
Consider working with a financial advisor when creating plans like these for retirement. You may also want to build in cushions for healthcare, housing, taxes, longevity and market risks to help you feel even more secure in your retirement plans.
Retirement Planning Tips
- If you need help planning out your retirement years, a financial advisor may be able to help. Finding a 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.
- SmartAsset’s Social Security calculator helps answer the question of how much can you expect in Social Security benefits.
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