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Is $2.5 Million Enough to Retire at 65?


For most people, it will be little or no problem to retire at age 65 if they have $2.5 million in savings. This amount of capital invested prudently is likely to provide sufficient income for a lifestyle comfortable enough to satisfy a large majority of retirees.

However, some variables that could change include an extended bout of high inflation, a protracted market downturn and unexpected healthcare costs. And it can also include a longer-than-projected lifespan. However, surveys of retiree financial satisfaction indicate that even much lower sums are probably enough to pay for an enjoyable retirement.

For answers to your retirement questions, talk to a financial advisor.

Retirement Income From $2.5 Million

A retirement nest egg of $2.5 million can likely produce an annual income of $100,000 for as long as you are likely to live. This is using the 4% withdrawal rate that many advisors consider safe.

After starting with the first withdrawal of 4% of the total, the annual withdrawal will adjust for inflation. For example, if inflation runs at the 2% rate that is the target of federal policymakers, the retiree will withdraw $100,000 the first year of retirement, $102,000 the second year, $104,040 the third year and so on.

According to this model and conventional wisdom, a 4% withdrawal rate will allow a portfolio to last for at least 30 years. This would permit a 65-year-old retiree to maintain consistent purchasing power until age 95 and beyond.

For most retirees, this will likely be adequate to maintain a satisfying standard of living. Only about 3% of 2,000 retirees surveyed by the Employee Benefit Research Institute in 2022 spent $7,000 or more per month, equivalent to $84,000 in annual spending.

This model does not include a number of other factors. For instance, nearly all retirees are eligible for Social Security. For 2023, the maximum monthly Social Security benefit for people who claim benefits at full retirement age is $3,627. That’s equal to more than half the spending of the top 3% of retirees surveyed by EBRI. And, like the safe withdrawal rate, Social Security benefits are indexed to inflation.

While it appears $2.5 million is easily enough to retire at 65, many factors could change the outlook. Among them are medical costs, inflation, market fluctuations and life expectancy. Here are ways these variables might influence the viability of retiring at 65 with $2.5 million.

Potential Impact of Healthcare Costs

SmartAsset: Is $2.5 million enough to retire at 65?

While 65 is the age of eligibility for Medicare, that doesn’t mean retirees won’t have any out-of-pocket healthcare costs. In fact, the Fidelity Retiree Health Care Cost Estimate suggests an average 65-year-old couple could need $315,000 to cover the costs of health care after they retire, assuming a typical lifespan. The largest part of this will go for co-payments, coinsurance and deductibles, according to Fidelity.

This added expense could significantly reduce the amount of income you have for other living expenses. For example, if you are a 65-year-old married couple, according to Fidelity’s estimate, you would spend an average of $15,750 a year or $1,312.50 per month on healthcare. You might have to reduce your other expenses or increase withdrawals from your retirement account to cover it.

Potential Impact of Inflation

Inflation can powerfully influence retirees’ financial well-being. When inflation rises, it reduces the purchasing power of money withdrawn from your retirement account. You can increase the withdrawals to maintain purchasing power, but this risks depleting the retirement nest egg sooner.

Exacerbating the problem is the fact that markets often decline during periods of high inflation. When valuations are down, you may have to sell more of your portfolio in order to increase withdrawals so you can maintain your purchasing power and lifestyle. That can reduce your future ability to generate income.

Potential Impact of Market Downturns

Inflation is not the only cause of market downturns. Business cycles and financial crises can exaggerate the normal fluctuations in stock market valuations. Whatever the cause, withdrawal rate research already accounts for normal downturns so there isn’t any need to panic just because returns are negative.

On the other hand, be aware that if you are selling your investments to generate income for living expenses, you have to sell more of them when valuations are down. This can be particularly worrisome if it happens in the first few years of your retirement. This phenomenon is known as sequence of returns risk. In a down market this raises the issue of sequence risk, the idea that down markets in the first few years of retirement are particularly worrisome.

That approach can work for a while. But over the long term, selling when valuations are low can cause your nest egg to deplete faster than you planned. This may require tightening your belt and reducing living expenses to avoid selling in down markets.

Potential Impact of Longevity

While living a long life is positive, it’s possible to outlive the amount of money you have saved for retirement. Many financial planners use life expectancy to age 95 or 100 when developing plans for funding retirement.

For most people, this will be more than adequate. The Social Security Administration says an average 65-year-old male will live another 18.09 years, to age 83. The average 65-year-old woman can expect to live more than two years longer, to nearly age 86.

These are only averages, and somewhere around half of all 65-year-olds will live longer than these estimates. However, people in their 80s and 90s also generally reduce their spending, with the exception of healthcare costs.

If you have exceptionally long-lived parents, few health problems of your own and generally healthy lifestyle habits, you may plan for a longer life in retirement. However, only 1,000 out of 100,000 men live to be 100, according to Social Security. And the figure for women, while twice as high, is still only a little more than 2,000 out of 100,000.

Factor In Estate Planning

SmartAsset: Is $2.5 million enough to retire at 65?

Retiring at 65 years old with $2.5 million involved high income and savings. Over the course of the rest of your life, you want to think about stretching your savings more. With estate planning, adding members of your family as a beneficiary for a home or vacation home you paid off with a mortgage can have long-term positives. No mortgage to pay down the road means more income to pursue other activities.

You may also want to think about additional income streams with your retirement accounts as well and setting up beneficiaries in case. And if you own a business, adding your family as a beneficiary so that they can decide to keep the business running or sell it can also be another strategy.

Strategies to Maximize Retirement Savings

Strategies to Maximize Retirement Savings

Saving $3 million for retirement savings is an ambitious goal. Still, depending on what you plug into the calculator (and the plan you put together with a financial advisor), it might be necessary. In that case, there are steps you can take to maximize your retirement savings.

One of the most essential concepts here is to use compound interest to your advantage. Compounding means you will continue to earn interest on the interest you earned in the past. In other words, the more time that passes, the more quickly your portfolio grows. Thus, the longer you have, the greater the effect of compounding. Even if you can only save a small amount each month, starting early can make a big difference in the long run.

It’s also a good idea to max out retirement accounts like a 401(k) or an IRA. You can contribute up to $22,500 per year to a 401(k) and up to $6,500 per year to an IRA (as of 2023). Maxing out these accounts can help you save more money on taxes and grow your retirement savings faster.

You should also diversify your investments by investing in stocks, bonds and real estate. Doing so has several advantages, such as these assets often have different volatility profiles. But they can also have different tax advantages, so investing in more than one can gives you an edge.

Bottom Line

A nest egg of $2.5 million is likely to be adequate for most retirees to retire in comfort for as long as they live. Variables that could affect this include healthcare costs, inflation, market downturns and life expectancy. But at generally accepted safe withdrawal rates, this much capital can produce income that is more than all but a small minority of retirees spend.

Retirement Planning Tips

  • A financial advisor can help you plan for a secure retirement starting at any age. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have free introductory calls 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.
  • Deciding how to invest can be a challenge, especially when you don’t know how much your money will grow over time. SmartAsset’s investment calculator can help you estimate how much your money will grow to help you decide which type of investment is right for you.
  • One of the most effective ways to reduce expenses in retirement is to relocate to a region with lower costs of living. SmartAsset’s Cost of Living Calculator can estimate how your cost of living will change if you move from where you are now to another part of the country.

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