Achieving the goal of retiring at 50 allows ample time to pursue the passions put aside during your career and create cherished memories with loved ones. Nevertheless, leaving the workforce 12 years before qualifying for Social Security presents a significant financial hurdle. Despite a $4 million sum potentially generating a substantial investment income, careful planning remains essential because retirement expenses are unpredictable. For instance, healthcare costs and inflation present obstacles to any retirement budget. The following guide will help determine if $4 million is adequate for your retirement situation. For a more personalized answer, consider working with a financial advisor.
Is $4 Million Enough to Retire at 50?
The 4% rule is a reliable way to tell if your nest egg is sufficient for retirement. In this instance, 4% of $4 million means you would receive $160,000 annually. Collecting this distribution each year would leave your principal untouched, allowing it to generate similar returns into perpetuity. Therefore, you can use the figure of $160,000 when calculating your retirement income versus expenses.
A recent Bureau of Labor Statistics study indicates the average 65-year-old spends about $52,000 annually in retirement. Although this number is well below your residual income of $4 million, your unique retirement situation may include higher expenses. As a result, it’s best to define your retirement budget to see if $4 million is sufficient.
How to Determine How Much You Need to Retire
Affording retirement with $4 million means having a detailed financial plan. Here’s what to remember when running the numbers:
Estimate Your Costs in Retirement
Your monthly expenses during retirement dictate how feasible it is to live on a specific income. Your lifestyle significantly impacts monthly expenditures, so your monthly income will determine what you can afford. For instance, an annual income of $160,000 corresponds to a monthly income of $13,333. This amount offers ample room to include leisure activities and trips in your budget. For example, the average weeklong vacation to London costs about $3,500 per person, according to USA Today. Therefore, your monthly budget has room for adventures and excursions.
Life expectancy is another critical factor in retirement planning. For instance, if you retire at 50 and live until 85, you’ll have a 35-year retirement. Remember, medical care costs increase as you age, so it’s essential to account for them in your plan. A good rule of thumb is to allocate 15% of your annual income to cover medical expenses. In this case, that would amount to $24,000 annually.
In addition, taxes don’t vanish during retirement. You must budget for income taxes, property taxes and capital gains taxes. For example, traditional IRAs and 401(k)s will incur income taxes because they used pre-tax dollars from your working years.
Moreover, you might be subject to various tax rates if you have numerous retirement accounts. For instance, selling stocks means paying capital gains taxes. That said, you can avoid income taxes if you withdraw money from a Roth IRA or Roth 401(k). Therefore, understanding your retirement account type is crucial to calculating how taxes affect your income.
Remember, federal law imposes a 10% penalty if you withdraw money from traditional retirement accounts before age 59.5. Therefore, you’ll need to allocate your $4 million among different account types. For example, savings and brokerage accounts incur no early withdrawal penalties, meaning you can access their funds anytime during retirement.
Whether it runs rampant or quietly grows, inflation is a relentless issue you must account for in your budget. Experts recommend you increase your budget by 3% annually to address inflation.
Pinpoint Retirement Income Streams
Once you’ve listed your expenses, you can lay out your retirement income. It’s a good idea to collect income from multiple sources, such as:
- Retirement Accounts: An IRA or 401(k) will be foundational in your calculations. For example, a portfolio with a $2 million principal averaging a 4% return can provide $80,000 of income per year. Allocating your other $2 million among other investment vehicles will help you diversify and generate the sufficient income you can withdraw before age 59.5 without penalty.
- Social Security: How long you work influences your Social Security income. For example, according to the Social Security Administration, the average worker collects $1,320 monthly in Social Security if they start taking benefits at 62. However, delaying Social Security boosts your benefit by 8% each year, maxing out at 70. So, the size of your Social Security check depends on when you start collecting your benefit.
- Annuities: An annuity is a policy guaranteeing monthly income from an insurance company. You purchase the contract for a specific price through installments or a lump sum. Then, you receive a check every month during retirement. For instance, a $2 million annuity will pay between $10,000 and $20,000 per month, but payments vary based on the product and the company you choose.
- Whole Life Insurance: A whole life insurance policy is an account you can save money in and leave a lump sum payment to your beneficiaries when you’re deceased. In addition, you can withdraw money from your policy during retirement (you’ll pay standard income taxes on withdrawals). A whole life policy usually grows at a rate of 2% or less, meaning this asset will supplement your retirement plan rather than play the main role.
- Bank Accounts: The current inflation surge has made interest rates soar and the upside is higher interest rates. As a result, high-yield savings accounts provide returns of 4% or more. In addition, they don’t have early withdrawal penalties, meaning you can access them before age 59.5 without hassle.
Run the Numbers
Now that you know your income and expenses, you can get down to the nitty-gritty. Let’s say you allocate your nest egg in the following way: $1.5 million in an IRA, $1.5 million in a brokerage account and $1 million in high-yield savings accounts and certificates of deposit (CDs). The IRA holdings are inaccessible for the first nine and a half years of retirement, so you’ll rely on your brokerage and bank accounts. Moreover, you will enhance your earnings by claiming Social Security at age 62. Thus, the first nine years of retirement will be more frugal.
Your two accessible accounts have a total value of $2.5 million. With a 4% rate of return, you could enjoy an annual income of $100,000. Hence, your monthly income at age 50 would be $8,333. To accommodate inflation, this amount will rise by 3% each year. Once you turn 59.5 years old, you can withdraw 4% from your IRA, granting you an annual income of $160,000. Then, at 62, you’ll start receiving another $1,500 per month from Social Security, boosting your monthly income to $14,833.
Remember, your monthly expenses during your first nine and a half years must be less than $8,333 for this plan to work. You can put less money into your IRA if you want to withdraw more money sooner or work part-time to pad your budget. It’s a good idea to store more of your funds in an IRA to facilitate growth and bolster your income after age 59.5.
How to Boost Your Retirement Income
A $4 million retirement fund creates a six-figure income, but that’s no guarantee of a comfortable retirement. You can increase your income in the following ways if your budget is still tight:
- Postpone Social Security Benefits: Taking Social Security benefits at age 62 provides another income stream, but doing so means missing out on more money later. In contrast, if you delay receiving your benefits, you can increase your benefit amount by a substantial 8% each year. Therefore, it’s imperative to begin collecting your Social Security benefit at a deliberate time to optimize your overall retirement income.
- Earn Interest Income: Interest rates are at a fifteen-year high and retirees can cash in on the trend. Specifically, certificates of deposit (CDs) and savings accounts are low-risk investment vehicles with interest rates of 4% or more.
- Understand Your Income Tax Implications: Both Roth IRAs and Roth 401(k)s offer a significant benefit, the ability to generate retirement income without triggering taxes. This feature allows you to withdraw funds from these accounts without entering a higher tax bracket. The optimal timing for using these accounts depends on your individual circumstances. For example, it may be beneficial to utilize these funds during your later years when you would like to minimize your tax liability.
How to Make Your Savings go Further in Retirement
The sustainability of your retirement fund largely depends on your spending habits. To avoid seeing your principal evaporate, consider implementing these methods to safeguard your nest egg and ensure its longevity.
Use a Budget
Budgeting is indispensable for ensuring your money lasts. So, tracking your expenditures and establishing a spending plan is how to live within your means. This principle applies equally to retirement and your working years. Contrary to popular belief, budgeting does not prohibit you from enjoying your money. Instead, by planning to spend on entertainment or luxuries ahead of time, you won’t feel anxious when you shell out for a concert or a grandchild’s birthday present.
Choose Low-Fee Annuities
Annuities can provide consistent income but can also fall prey to exorbitant fee structures. The management costs and contract adjustments (called ‘riders’) vary between companies. Therefore, it’s key to shop around for annuities and gather all the details on the available contracts. Likewise, it’s best to understand what you’re paying and why before committing to a policy.
Care for Your Health
All retirees face significant healthcare costs in some form. While receiving medical care throughout retirement is necessary, you can control the timing and method of your healthcare visits by practicing preventative care. In essence, investing in regular check-ups and routine health screenings is more cost-effective in terms of time and money.
Since retiring at 50 means waiting nine and a half years to draw from your primary retirement account, part-time work can provide needed income in the interim. So, dedicating 20 hours per week to a job can buttress your finances sufficiently during the first leg of retirement.
Pay Off Your Mortgage
While retiring at 65 gives you plenty of time to pay off your mortgage, leaving the workforce 15 years sooner means you might have a substantial mortgage. However, paying the remaining balance in one stroke can free up money in your budget. Plus, you’ll save money in the long run by not paying interest on the loan anymore.
The Bottom Line
Retiring at 50 is an excellent opportunity to enjoy the years ahead without worrying about work and $4 million is a reasonable amount to make it possible. The initial nine and a half years may be difficult since federal penalties bar access to your retirement account. However, you invest in other sources of income to earn $100,000 annually during the first decade of retirement, such as brokerage and savings accounts. After you turn 59.5, you’ll have an annual income of around $160,000 and can also claim Social Security at 62 to increase your income.
However, your financial situation is unique, so it’s essential to calculate your retirement expenses accurately. If retiring at 50 is not feasible, you may have to modify your retirement budget or savings goal. Regardless of your income or age, a successful retirement requires a comprehensive plan.
Tips for Retiring at 50 with $4 Million
- Investing $5 million to support yourself in early retirement can be intimidating. Mistakes while navigating between account types and understanding tax implications can be costly and even jeopardize your ability to retire. Fortunately, help from a financial advisor can help you create a detailed retirement plan. Finding a qualified 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 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.
- If certificates of deposit are of specific interest to you, you can leverage these assets for substantial interest income. However, doing so takes time and attention, unlike having a savings account. Follow this guide to learn how to build a CD ladder.
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