Two million dollars may seem like more than enough money for retirement, but even that amount can vanish quickly in the face of medical expenses, inflation and taxes. If you expect to retire at 50 with $2 million, careful planning is a must. Here are the factors to consider and how to calculate your expenses versus the income that a $2 million nest egg may generate. A financial advisor can help you build income streams for retirement.
Can You Retire at 50 With $2 Million?
Retiring at 50 with $2 million means crunching some numbers. That process begins with estimating your retirement expenses. According to the Bureau of Labor Statistics 2021 Consumer Expenditures Surveys, a typical 65-year-old retiree spends an average of $52,000 per year. Of course, your lifestyle and where you live may require more than this average, so it’s best to consider these three factors discussed below to understand how much income you’ll need to retire at 50:
1. Estimate Your Costs in Retirement
The affordability of retirement depends on your monthly expenses. Therefore, how you expect to live will influence your ability to retire at 50. For example, if you plan to travel often during retirement, your annual budget might be $10,000 or $20,000 higher than it would be otherwise. On the other hand, keeping your monthly expenses to a minimum, such as living in a paid-off home, can mean going years without dipping into your retirement account.
In addition, you’ll need to consider how long you’ll be retired. For instance, if you expect to live until 85, your $2 million must last 35 years. This factor is also significant because healthcare costs tend to peak from age 65 to 74, then drop off slightly, according to Fidelity. As a result, it’s recommended to designate at least 15% of your income for medical expenses.
Taxes are also a critical element to consider. Remember, if you pay off your mortgage, you still must pay property taxes. Furthermore, your income streams will have varying tax implications. For example, you won’t owe any income taxes on Roth IRA withdrawals, but you’ll have to pay taxes on traditional 401(k) income. Another fact to keep in mind is that interest is taxed as ordinary income, while investment income is taxed as capital gains. Plus, withdrawals from retirement accounts before age 59.5 generally result in a 10% penalty. Therefore, it’s wise to identify the income that will incur taxes and influence your tax bracket.
Finally, inflation is more than just a current issue. Even in typical circumstances, the cost of living increases annually. So, you must account for inflation in your budget. A good rule of thumb is to increase your expenses by an inflation rate of 3% each year.
2. Pinpoint Retirement Income Streams
After estimating your expenses in retirement you can calculate your retirement income. Fortunately, you can withdraw income from multiple sources, including the following:
- Retirement accounts: Your IRAs, 401(k)s and brokerage accounts will likely contribute a significant portion of your income. For example, if your portfolio averages a 5% return, your $2 million could generate $100,000 in income to fund your lifestyle, which means you wouldn’t have to tap into your principal. Of course, tapping your retirement accounts before age 59.5 will trigger the early withdrawal penalty, meaning your portfolio may not last as long.
- Social Security: Your work history and retirement age affect your Social Security income. For example, the most you can collect in Social Security is $2,572 per month in 2023 if you claim your benefits at 62. However, the longer you delay your benefits, the more they increase. Benefits stop increasing in value by the time you turn 70. Knowing your potential Social Security payment will help you coordinate payouts from your other income streams.
- Annuities: An annuity is a contract you purchase that distributes a lump sum payment or a series of payments. Because annuities come in fixed and variable types, it’s crucial to identify how much you can rely on from your policy. For example, a variable annuity might underperform and provide less income in a down market.
- Whole life insurance: A whole life insurance policy is like a savings account with a death benefit. Whole life policies typically have cash values that increase over time and can be tapped while you’re still alive. As a result, your whole life policy can generate income for you in retirement, but withdrawals will reduce your eventual death benefit.
- Bank accounts: Specifically, high-yield savings accounts provide advantages to early retirees. First, savings accounts don’t have early withdrawal penalties like retirement accounts do. Second, a high-interest savings account can earn 3% interest or higher as of early 2023, making it a viable low-risk investment.
3. Run the Numbers
Now that you know the essential numbers to account for, you can put them together in your retirement plan. However, estimating conservatively is key. For example, say you’ll receive $70,000 the first year of retirement from your nest egg – a 3.25% withdrawal from $2 million. You also plan on collecting Social Security at 62 for $2,000 monthly. So, your monthly income at 50 will be $5,833 per month. Increasing your withdrawals by 3% each year to account for inflation means you’d be withdrawing $8,074.19 each month by the time you’re 61. Then, once you hit 62, your income will increase to $10,316.41 because of Social Security.
As a result, retiring at 50 with $2 million means initially living on $5,833 each month and then adjusting for inflation each year. Of course, you can withdraw a higher amount before age 62, but you might take away from your principal if your portfolio underperforms. Allocating more of your investments to stocks and higher-performing assets can increase your income, but doing so puts your money at higher risk.
How to Boost Your Retirement Income
If retiring at 50 with $2 million isn’t feasible within your budget, you can fill the gap with the following tactics:
- Delay Social Security Benefits: You can start taking Social Security at 62. However, you’ll increase your benefit amount by about 8% each year you wait to receive it, maxing out at age 70. For example, if your monthly Social Security benefit is $2,000 at age 62, waiting until 70 can increase your monthly income by more than $1,500.
- Find a Better Interest Rate: Interest rates have risen with inflation, meaning you can receive excellent returns through low-risk investments. For instance, you can find savings accounts and certificates of deposit (CDs) with rates of 4% or higher, as of early 2023.
- Use Tax-Free Income Strategically: Withdrawals from a Roth IRA or Roth 401(k) are excellent for boosting your income without increasing your tax burden. Tax-free income is a suitable supplement for taxable income because it keeps you in your current tax bracket. Therefore, using it at an ideal time – such as when you don’t want to incur more taxes through income from a savings account – can give you more bang for your buck.
The Bottom Line
Retiring at 50 with $2 million requires meticulous planning and multiple income streams. Since withdrawals from retirement accounts before age 59.5 incur a 10% penalty, diversification insurance is essential. In addition, calculating your living expenses and taxes will help you identify the monthly income you’ll need before Social Security kicks in. As a result, you must invest deliberately and create a detailed plan to retire before the typical age.
Tips for Retiring at 50 with $2 Million
- Retiring at 50 involves many moving parts, especially since you’ll need multiple income streams. Plus, fine-tuning your financial circumstances for taxes is a must. If you’re lost, you can get help from a financial advisor. 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.
- Having a spending plan is essential for retiring early. Your monthly income will dictate your lifestyle. To that end, here’s how to make a retirement budget.
Photo credit: ©iStock.com/Zorica Nastasic, ©iStock.com/shapecharge, ©iStock.com/uzhursky