Retiring when you’re in your 60s or younger is the goal for every worker. But can you retire comfortably at the age of 65 with $1 million? For some people, yes. But the true answer is that there is no one answer to this question. Everyone’s life circumstances are different. We will discuss examples to see how you can manage your retirement and your savings goals, all of which can help guide you as you make your own decisions.
A financial advisor can help you create a financial plan for your expenses in retirement.
Can I Retire at 65 With $1 Million?
Yes, it is possible to retire with $1 million. Retiring at the age of 65 with $1 million can seem like a lot of money to a lot of retirees. But the truth is, that amount depends entirely on your household, your finances and your needs.
For example, how big or small your family is and the responsibilities you might have as a breadwinner can significantly determine how much $1 million can carry your finances during the duration of your retirement.
Another factor to consider is how many income streams you have to help maintain $1 million over the course of your retirement. You have to remember that when you retire, you are looking to stay that way for the rest of your life.
So stretching $1 million for the next 25 to 30 years at least may not be enough for some people. Here are tasks that every retiree has to put into consideration.
Social Security and Medicare
When we’re talking about retirement, we first need to look at Social Security and Medicare. If you’re retiring at 65, then you will be at or near eligibility for both programs, which is a very good thing.
In the case of Medicare, this means that you will not have to plan for extra healthcare spending. Now to be very clear, this is not saying that you don’t have to plan for healthcare. Medicare doesn’t cover everything and it isn’t free. However, you won’t have to pay for basic health insurance, which is great.
Social Security, on the other hand, is slightly more complicated.
For everyone born in 1960 and after, full retirement age doesn’t begin until age 67. If you take Social Security before this age you will get reduced monthly benefits throughout all of retirement. You get full benefits if you start collecting at 67. You get enhanced benefits if you start collecting after 67, up to age 70 when you receive the maximum monthly payments.
For example, here are the maximum Social Security monthly benefits for someone who begins collecting Social Security in 2023:
- At age 62 – Up to $2,572 per month
- At age 67 – Up to $3,808 per month
- At age 70 – Up to $4,555 per month
This is a big difference. Just waiting from 67 to age 70 can generate almost $9,000 per year in additional income for the rest of your retirement, subject to the Social Security Administration’s (SSA) annual cost of living increases.
The Benefits
There are two upshots to all of this. First, if you retire at age 65, you are close to full retirement age according to the Social Security Administration. This means that you don’t have to anticipate filling in the gap for long.
But if you want to collect full benefits, you should prepare for at least two years without Social Security income. And if you want to collect maximum benefits, you should prepare for five years without this money. That means making sure your retirement account can handle more withdrawals early on to make up for the difference.
Total Income
While retirement has many moving pieces, ultimately our question is this: Can your retirement account plus your Social Security income offset your expenses? If the answer is sustainably yes, then you have enough money. If not, then not. In the case of $1 million at age 65, the “money in” side of that formula will generally be strong.
One way to look at this is with the industry-standard rule of thumb. The classic rule is that you should plan to withdraw about 4% from your retirement account each year. Accounting for income, returns and drawdown on principal, this should give you several decades of savings.
A $1 million retirement account gives you around $40,000 per year for the first few years of your retirement. Once Social Security kicks in, this will give you on average anywhere from $65,000 to $95,000 per year depending on your lifetime earnings and when you began collecting benefits.
However, the 4% rule of thumb has come under criticism. Most importantly, it increasingly doesn’t reflect the market of the last 40 or 50 years. For example, on average the corporate bond market alone pays a 4% interest rate per year on average.
Your Portfolio
A $1 million portfolio with nothing but investment-grade corporate bonds could generate approximately $40,000 per year – indefinitely – from interest payments, only having to trade assets when its underlying bonds mature.
On the other end of the risk spectrum, the S&P 500 has an average 10% – 11% overall rate of return. This means that a $1 million portfolio that holds just S&P 500 index funds could generate an average of $100,000 in pure returns.
Finally, a $1 million annuity can sometimes make a very generous payout. According to Schwab, even if you invested in your annuity on the day of your retirement, with $1 million you can potentially collect $6,000 per month or more for the rest of your life.
All of which is to say that with $1 million, you can certainly collect a comfortable amount of money in your retirement. At the most conservative estimates, you might have to budget very carefully for the first two years in order to stretch your money until Social Security kicks in, but otherwise, this is all very doable.
Spending and Needs
Based on our numbers above, you can expect anywhere from $80,000 to $180,000 per year in your retirement depending on how you decide to build your portfolio and what Social Security income you can expect.
Will that be enough money to cover your needs though? That’s an area that gets more difficult since it gets inherently more personal.
A good rule of thumb when you’re forecasting your retirement needs is the 80% ratio. As a general rule, in retirement, you will most likely need about 80% of your current income to maintain your current standard of living. The shift is because your finances change in retirement.
For example, you don’t have to make ongoing contributions to your retirement account, your taxes tend to go down and you generally have fewer daily expenses. In ways both large and small, you just tend to need less money.
So, for example, say that you make $100,000 per year right now. You should budget for about $80,000 per year in retirement. If you want to see what your own needs will be, we recommend using a good retirement calculator.
Beyond the general, look to your own life for major expenses that you should account for. Common issues include:
Urban Housing
If you live in a big city, you probably rent and it’s probably expensive. Make sure that your budget can grow as the rent goes up in years to come.
Medical Needs
If you have any special medical needs, make sure to account for that spending early on. Beyond that, don’t forget to budget for issues like supplemental insurance.
Dependents
The odds are that you don’t have dependents. But if you do, make sure to account for their needs in both your retirement and your estate planning.
Emergency Funds
Be sure to have a solid cash reserve to cover unexpected expenses, anything from a broken roof to a flat tire. It can be harder to get credit in retirement, so you will want cash on hand.
Market Emergency Funds
Sequence risk is the chance that you will have to sell assets from your portfolio during a down market. If you can set aside a solid amount of cash, you can avoid this risk by tapping into your savings when assets are down and replenishing that fund when they bounce back.
Bottom Line
Yes, it is possible to retire with $1 million at the age of 65. But whether that amount is enough for your own retirement will depend on factors that include your Social Security benefits, your investment strategy and your personal expenses.
Tips on Retirement Planning
- A financial advisor could help you create a financial plan for your needs and goals. 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.
- It’s important to start saving for retirement as soon as possible. But there are also several steps you can take if you’re a late starter planning for retirement. The first step begins with estimating how much money you will need.
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