Reaching $1.5 million in retirement savings is doable. While this is a lot of money, it's well within reach for most incomes. As long as you start saving early – ideally in your 20's – and take advantage of market returns, you can hit $1.5 million in retirement savings with even modest contributions to your retirement account. The key question is, will that be enough? Is $1.5 million enough to retire at 65, or should you plan on accelerating your savings or even delaying retirement? Here are five things to consider when asking that question.
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How Much Retirement Income Will You Need?
A $1.5 million nest egg can be more than enough to retire on, but it depends entirely on how much money you plan on spending. The more income you expect to replace, the more you will need to draw down from your retirement account and the larger it will have to be.
As a general rule, financial experts suggest that you should plan to plan to draw down between 60% and 80% of your pre-retirement income. So, for example, say you make $100,000 per year. In order to keep your current standard of living, you should plan for a retirement account that can generate between $60,000 and $80,000 worth of income per year for the rest of your life.
This helps you decide how much you will need to hold in your portfolio. For example, say you plan on retiring at 65. Let's also assume you will beat the odds and live for another 40 years. After all, it's better to overestimate than underestimate when estimating your life expectancy. As a result, you will need a portfolio that can generate $80,000 per year for 40 years.
Now, this doesn't mean you need $3.2 million in cash on hand. Your portfolio isn't static, it will continue to grow over time. Instead, to live on $80,000 per year in retirement, you will need about $1.8 million saved up by age 65. From there, growth and Social Security will fill in the gaps. On the other hand, if you trim that down to $60,000 per year, you would only need $1.08 million in your portfolio.
Either way, if we're asking "will $1.5 million be enough to retire on," the answer is … it depends. Yes, this can be plenty of money for a comfortable retirement, but it depends entirely on how much you will withdraw.
What Are Your Expenses?
When thinking about retirement spending, it's important to ask exactly what kind of lifestyle you imagine having. How will you spend your money? Where will you spend your money? What needs will you have and what kind of flexibility do you want? All of this will determine how much you need to withdraw each year. A few important issues to consider include:
Will you own your house or continue to rent it? Renters will need to anticipate those monthly payments indefinitely. Owners who have paid off their mortgage don't have much in the way of regular payments, but they'll need to set aside money for maintenance and upkeep. After all, you may not have to send the landlord a check, but boilers are still expensive to replace.
Travel and Entertainment
What kind of luxuries do you want to enjoy? Do you want to spend your retirement traveling or are you happy just going to the movies on a Saturday night? The more money you want to spend on entertainment, travel and other luxuries in your retirement, the more money you will need to have saved.
Location and Taxes
Where you live matters. Living in a city might give you access to many of the things you love, but it will come with a far higher cost of living. Some states are much more tax-friendly than others, but that can come at the cost of not living where you want. Also, be careful when it comes to making tax-based decisions. When a state claims to have low taxes, that often means it has no income tax and makes the difference up through sales taxes. Depending on how you structured your portfolio, this might actually increase your cost of living.
Look at how you want to balance your lifestyle and costs, and consider whether location can help with that.
The closer you get to retirement, the more seriously you should start taking your health. In part this is because healthcare will be one of your biggest long-term expenses, and if those costs are going to accelerate early it's best to know now. Make sure that you have coverage for specific needs like dental insurance and potential long-term care insurance, and account for that in your budget.
When Will You Take Social Security?
You can begin taking Social Security as early as age 62 or as late as age 70, and that choice makes a big difference. As of 2023, if you begin collecting Social Security at age 62 you can receive up to $2,572 in monthly benefits for the rest of your retirement. If you wait until age 70, you can receive up to $4,555. At the full retirement age (66 or 67, depending on when you were born), you can receive up to $3,627.
It's important to remember that this isn't guaranteed. Social Security is built to pay higher-income households more money, so the more you earned during your working life the more money you can receive from Social Security in retirement. But the basic structure doesn't change: the longer you wait, the more money you will get from this program.
If you retire at 65, but can wait five more years before collecting Social Security, you can nearly double your benefits. Calculate what your benefits will be based on your income and your retirement age and make sure to include that in your planning.
Do You Have Significant Assets?
One of the important elements of retirement planning is, essentially, backup planning.
To put this another way, what happens if the money in your account is not enough? What will you do if you're celebrating your 90th birthday and your accounts have all begun to dip perilously low?
This is an important question because it tells you how much security you need to build into your retirement account. For households that have significant assets, these can serve as the backup plan. Selling your home or valuable keepsakes may be a bad, if not heartbreaking, option, but they can serve as a backstop against late-age poverty.
On the other hand, if you do not have significant assets to fall back on, you should account for that in your retirement planning. In that case, you may want to grow your account more before retiring.
How Is Your Portfolio Growth Structured?
Finally, it's important to consider how your portfolio is structured. There are two primary issues to consider when evaluating your portfolio. First, based on your investments, what kind of growth and risk do you expect from your portfolio? This informs your approach because the more growth your portfolio generates, the less principal it will need going into retirement. But the more risk your portfolio is exposed to, the more cash you will want to keep on hand or reinvest.
Second, do you plan to live off investment income or capital gains?
Capital gains are the profits that come from selling an asset like a stock. Selling assets with capital gains will generate retirement income for you, but it may mean dipping into your principal and drawing down a portion of your holdings.
On the other hand, some assets automatically generate income or interest payments. For example, bonds pay you an interest rate, income stocks pay dividends and annuities are contracts that pay a fixed amount every year. The key thing about these assets is that they're durable. You don't need to sell them in order to generate that money.
The more money you earn off of income-generating assets, the less you will draw down on your portfolio's overall principal. For example, say you manage to build a portfolio that generates $80,000 per year in combined dividend, interest and annuity payments. In that case, the principal is of secondary importance. Whatever the amount, this is enough to retire on because you can live off those assets indefinitely.
It's harder to build a strong collection of income assets. If you can do it, though, you can reach the retirement dream: a self-sustaining portfolio.
You can certainly retire comfortably at age 65 on a $1.5 million, but your ability to do so relies on how you want to live in retirement, how much you plan to spend, when you plan to claim Social Security and how your portfolio is structured. Before making any big decisions, make sure to review your financial plan in detail.
Retirement Planning Tips
Social Security plays a significant role in most retirement plans and getting an accurate estimate of how much you can expect to collect can help you make more informed decisions about your future. SmartAsset's Social Security Calculator can help you estimate your future benefits based on how much you earn and when you plan to retire.
Good financial advice can make all the difference in retirement planning and finding a financial advisor doesn't have to be difficult. 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.
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