Everyone wants enough money waiting for them in retirement to live comfortably. But if you’re used to a certain lifestyle, you may need a bit more than the minimum amount. A nest egg worth $4 million can provide many retirees with enough money for everyday expenses, as well as general freedom to do what they want. If you’re preparing to retire with $4 million, there’s a number of specific tasks you’ll want to complete to ensure your continued success. You may also want to think about speaking with a financial advisor before putting anything into action.
Develop a Financial Plan
When you plan for retirement, you’re really planning for the long-term. According to the 4% rule, you can withdraw 4% from your total retirement savings in the first year of retirement. After that, you can continue to withdraw the same value amount, adjusted for inflation. This practice should allow your portfolio to last 30 years, at least.
So let’s say you want to have $4 million in savings for retirement. Based on that goal, you can withdraw $160,000 (.04 x $4,000,000) the first year. If inflation ran at 2% the next year, your second-year withdrawal would amount to $163,200 (.04 x 1.02 x $4,000,000).
But whether that will work for you will depend largely on your financial plan. These typically start with a retirement budget built to suit your specific needs. So, if $160,000 annually for the duration of retirement doesn’t accommodate you then you must find a budget that does.
Track your expenses to find your budget. This should span at least six months and account for basic living expenses (food, utilities, etc.), healthcare costs, hobbies and travel. Ask yourself if the spending you see will last you through your retirement. Additionally, consider whether you can adjust certain expenses to help bulk your savings.
Downsize Your Lifestyle and Living Expenses
As you get older, your priorities change. The big home you bought to support a family of five becomes a little too big. The items you filled it with seem to feel more like clutter. And it may no longer be comfortable for you if you have mobility concerns.
Because of reasons like these, older citizens commonly downsized in the past. Some sold their home and moved into active adult communities, while others purchased smaller properties closer to loved ones. These days, though, the status quo is shifting. Seniors still downsize, but a number of Baby Boomers want to stay in their homes. According to a 2019 survey from Chase Bank, of 12,500 households surveyed (2,918 of which were headed by Baby Boomers), 42% expect to remain in their home.
You may feel similarly, which means you can still downsize and save money without moving. Instead, think about your current life style. Re-evaluate what you spend your money on and repurpose it elsewhere when you can. For example, you may want to opt for public transportation and sell your car or choose fugal activities during get-togethers.
Build Up Your Passive Income
There are different types of “work,” according to the IRS. On the one hand, you have material participation, which means you actively engaged in a trade or business activity. For the IRS, material participation requires certain criteria, such as working over 500 hours in the trade or business. It results in earned income, like bonuses, wages, tips, salary and commission. On the other hand, you have passive activity.
Passive activity breaks into two categories: any trade or business not meeting material participation standards and rental activities (unless you’re a real estate professional). Earning income through a passive activity is one way to boost your retirement fund.
There is a variety of passive-income generating options out there. You can choose a low-risk asset like a high-yield savings account or invest in a higher-risk dividend stock. But passive income isn’t entirely hands-off. Rental income also counts toward it and, in some cases, money from a side gig. A blog, e-book or video channel can all contribute to passive income. Reinvestment and real estate may be your best options for retiring with millions, though.
Do Away With Debt
The reality today is that many households face retirement with debt looming over them. During the course of the previous decades, debt has grown significantly, particularly among older Americans. Based on a 2019 Congressional Research Service (CRS) report, of households headed by someone 65 years and older in 1989, 38% held debt. That nearly doubled by 2016 at 61%. The average amount also increased from $29,918 (adjusted for inflation) to $86,797.
Part of this is because expenses tend to increase with retirement, surprisingly. People take on extra debt, like to buy a home for retirement or when they apply for a new credit card. People also make hasty decisions when they realize they didn’t save enough. Avoid rash choices from the get-go.
Don’t make high-risk investments late into the game. Instead, revise your asset allocation as you age. That may require paying down high-interest debt or consolidating it for a lower interest rate early on.
Reassess Where You Choose to Retire
Certain states are more retirement-friendly than others. You may need to consider relocating to reduce your cost-of-living expenses or taxes.
For instance, Alaska, Florida, Georgia, Mississippi, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington and Wyoming have no state income tax or retirement income tax, or offer a significant tax deduction on retirement income. Along with that, they have friendly tax rates on things like inheritance, property, sales and your estate.
On the other hand, you may also want to look at states that don’t tax Social Security income. There are currently 37 states that avoid this type of taxation. In addition, they offer a deduction on either all forms or some forms of retirement income. You can see what each state offers in more detail here.
You may even want to consider moving abroad for your retirement. Certain countries like Portugal, Costa Rica and Malaysia rank among the cheapest places to retire. And, you can make an adventure out of it as you explore new cultures. However, you will need to research factors like health insurance, legal residency requirements and tax implications before making any decisions.
Reduce Your Tax Burden
Taxes can take a bite out of your finances. By dropping to a lower tax bracket, you can save money come tax time, though.
One way to reduce your income tax is through charitable donation. Giving money to a qualified nonprofit allows you to reduce your taxable income, though you need to itemize your taxes in order to do so. For this deduction, you can claim up to 60% of your adjusted gross income (AGI). Some wealthier individuals even create conservation easements. With that, you can work with a land conservation trust and take a charitable deduction based on the value of the property.
Make sure you also take advantage of your estate and gift exemptions as well. The gift tax exclusions for 2022 are $16,000 annually (up from $15,000 in 2021) and $12.06 million over your lifetime (up from $11.7 million in 2021), along with your estate tax exemption.
But there are many ways to reduce your tax burden. You can also make contributions up to a certain limit to your retirement account, FSA or HSA. Or you can put your money something relatively secure like a municipal bond. Municipal bonds build interest tax-free.
Planning for retirement is a tricky balancing act, as you’ll have multiple factors to consider. But having a specific financial goal and plan in mind will help you get ready to retire accordingly. Use the above steps as a basic outline to help you begin on your retirement planning journey. However, if you reach a hurdle or simply want some professional help, consider speaking with a financial advisor who serves your area. They can guide you through the process and find ways to help you reach your retirement goals.
- Retirement comes with its challenges. But worrying about money shouldn’t be one of them. If you want millions waiting for you by the time you retire, consider talking with a financial advisor. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three 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.
- It’s important to accrue a pool of savings when you plan on retiring. However, don’t forget to account for your Social Security benefits as well. Use SmartAsset’s Social Security calculator to estimate what you could receive.
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