Take Your Timeline Into Account
One of the biggest factors that affects how much you can withdraw is how many years of retirement you plan to fund from your retirement savings. Say you plan on a retirement of 30 years, you invest in a balanced portfolio, and want a high level of confidence that you won’t run out of money. Our research shows that a 4.5% withdrawal rate would have been sustainable 90% of the time .2
But if you work longersay you expect to retire at age 70or if you have health issues that compromise your life expectancy, you may want to plan on a shorter retirement periodsay, 25 years. The historical analysis shows that, over a 25-year retirement period, a 4.9% withdrawal rate has worked 90% of the time.
On the other hand, if you are retiring at age 60 or have a family history of longevity, you may want to plan for a 35-year retirement. In that case, 4.3% was the most you could withdraw for a plan that worked in 90% of the historical periods. These may sound like small differences, but they could equate to thousands of dollars in annual retirement income.
The good news is that even with the market’s historical ups and downs, these withdrawal amounts worked most of the timeassuming that investors stuck to this balanced investment plan. The takeaway from this analysis is that the longer your retirement lasts, the lower the sustainable withdrawal rate.
Past performance is no guarantee of future results.
Why You Will Need $2 Million To Retire
Modified date: May. 17, 2021
in which 12-year-old Preston writes himself a check for $1 million and lives in the lap of luxury. Even in 1994, when the movie was made, it was absurd to think he could buy the things he did with just $1 million . That wasnt reality.
And today, the truth is, even $2 million isnt as much money as we think it is.
When we plan for retirement, we focus on how much money we think well need.
Unfortunately, we underestimate that number. We assume our expenses will fall, that well earn a certain rate of return, and that Social Security will fill in the gap. But we often underestimate our expenses and altogether fail to consider inflation, taxes, investment risk, and the chance that we could live a long, long time.
This is why you will need at least $2 million to retire.
Reaching The $2 Million Mark By Retirement Age
There are two keys to building a healthy nest egg: Start saving as early as possible, and save as consistently as you can. The sooner you begin contributing to your retirement fund, the less you’ll need to save each month to reach your goals. And by saving at least a little on a regular basis, those savings will add up over time.
How much you’d need to save each month to accumulate $2 million depends on your age now, how much you currently have saved, and what age you plan to retire. Assuming you’re earning a 7% annual rate of return on your investments and you expect to retire at age 65, here’s how much you’d have to contribute to your retirement fund each month to save $2 million, depending on the age you began saving:
|Age You Began Saving|
However, don’t let these numbers discourage you from saving for retirement. Not everyone will be able to save $2 million by the time they retire, and that’s OK. In fact, you may not even need that much to retire comfortably. Rather than aiming toward an arbitrary target, set a personalized goal based on your unique situation and work toward that instead.
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Retirement Savings: How Long Will My Money Last And How To Stretch It
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Figuring out how many years your retirement savings will last isnt an exact science. There are many variables at play investment returns, inflation, unforeseen expenses and all of them can dramatically affect the longevity of your savings.
But theres still value in coming up with an estimate. The simplest way to do this is to weigh your total savings, plus investment returns over time, against your annual expenses.
Try our calculator to get your estimate:
The Impact Of An Extra Income Stream
Lets say youve tweaked your expenses, and see that you can cover them with a retirement withdrawal of 4%. But since youre only 55, you sensibly dont want to withdraw from your 2 million dollar savings just yet.
So, you decide instead to increase your dividend income and also create an extra income stream of $1,500 a month from consulting.
Next, lets equate this $1,500 a month to the amount of savings needed to generate that same amount of income each month using a 4% retirement withdrawal method.
$1,500 * 12 Months = $18,000/.04 = $450,000
This math shows that generating an extra $1,500 a month income is like having another $450,000 in savings!
This is the magic I was referring to earlier.
Read my related post How Many Income Streams Should I Have?
Below are the factors to consider that have been addressed in this post, and the amount of control investors have over each of them. We often feel like we cannot control our finances, especially in retirement. The key is to control what we can and manage risk around what we cannot control.
|Table By Camille Gaines, AFC||RetireCertain.com|
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How Active You Are
One study showed that those who are active and exercise more will live longer than those who dont. If youre already a fitness nut, plan on living longer than your couch-potato counterparts. If you arent one who regularly exercises, get started now. You dont have to run full marathons, but you can ride a bike or even do some gardening for a couple of hours. Both of these simple tasks will help you live longer.
Medellin Colombia V Phoenix Arizona
Nestled in the valley between the western and central ranges of the Andes Mountains is Colombias second largest city, Medellín. Blessed with perfect year-round spring-like weather and First World infrastructure, it is attracting more and more expats seeking a really high-quality, cosmopolitan lifestyle.
Medellín is truly First World, says Jeff Raheb of his and his wife Heathers new home. We are now living for 30% to 50% less than back home, says Heather.
How much you pay in rent in Medellin will depend on what type of lifestyle you want to have. For example, rent for a three-bedroom, two-bathroom, unfurnished apartment ranges from $400 to $1,000 per month. Expect to pay on average $700 a month.
To compare: A three-bedroom apartment outside the center of Phoenix, AZ is around $1,575 a month.
Inexpensive and quality healthcare is something Colombia is not short on. According to a recent study by América Economia, eight of the top-ranked hospitals in all of Latin America are located in Medellín. Even if you decide to pay-as-you-go, and not sign up for health insurance, your out-of-pocket costs will be quite low. A consultation with a specialist will cost about $50 and you will get an appointment within a couple of weeks, not months.
Typical healthcare costs
Doctor visit $30
Dentist : average about $35
To compare: Electricity, heating, air conditioning, water, and garbage for an apartment in Phoenix, AZ will cost you $178 a month.
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To Enjoy Retirement Be Flexible With Your Spending
This is one of the most important conversations we have with clients as they approach retirement. We remind them they dont know how long their health will allow them to keep doing the things they love, so make these activities a priority.
Whether its traveling the world or splurging on season tickets at the ballpark and dining at four-star restaurants, your expenses may exceed the 4% rule in the early years. But thats OK. In reality, retirement spending often comes in a U shape as opposed to a straight line. Retirees often spend more in their 60s and 70s and less in their 80s. One of our favorite stories involves a client who was spending more than 4% shortly after he retired, and we warned him that he could run out of money if financial markets took a big hit. His response was unforgettable. He said he was losing a good friend of his almost every year, and he wanted to make sure he did everything he ever wanted to do before his number was up.
He said if the stock market crashes, wiping out a significant portion of his wealth, he would be just fine sitting on the back porch sipping lemonade while waiting for the grandchildren to come over and play. He was extremely comfortable tying his retirement largely to the U.S. economy and markets. Are you willing to do this to some degree?
How Much Money Do You Need To Retire
A common guideline is that you should aim to replace 70% of your annual pre-retirement income. This is what the calculator uses as a default. You can replace your pre-retirement income using a combination of savings, investments, Social Security and any other income sources . The Social Security Administration website has a number of calculators to help you estimate your benefits.
It’s important to consider how your expenses will change in retirement. Some, like health care and travel, are likely to increase. But many recurring expenditures could go down: You no longer need to dedicate a portion of your income to saving for retirement. You may have paid off your mortgage and other loans. And your taxes are likely to be lower payroll taxes, which are taken out of each paycheck, will be eliminated completely.
Be sure to adjust based on your retirement plans. If you know you wont have a mortgage, for instance, maybe you plan to replace only 60%. If you want to travel every year, you might aim to replace 100% or even 110% of pre-retirement income.
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Am I Eligible For Old Age Security
Eligibility for Old Age Security depends on how much income you earn. The default value in the calculator is the 2019 maximum monthly payment regardless of your marital status. You can check the latest Old Age Security payment amounts to find out exactly how much money you’ll receive – and add it to the calculator for more accuracy.
Impact Of Inflation On Retirement Savings
Inflation is the general increase in prices and a fall in the purchasing power of money over time. The average inflation rate in the United States for the past 30 years has been around 2.6% per year, which means that the purchasing power of one dollar now is not only less than one dollar 30 years ago but less than 50 cents! Inflation is one of the reasons why people tend to underestimate how much they need to save for retirement.
Although inflation does have an impact on retirement savings, it is unpredictable and mostly out of a person’s control. As a result, people generally do not center their retirement planning or investments around inflation and instead focus mainly on achieving as large and steady a total return on investment as possible. For people interested in mitigating inflation, there are investments in the U.S. that are specifically designed to counter inflation called Treasury Inflation-Protected Securities and similar investments in other countries that go by different names. Also, gold and other commodities are traditionally favored as protection against inflation, as are dividend-paying stocks as opposed to short-term bonds.
Our Retirement Calculator can help by considering inflation in several calculations. Please visit the Inflation Calculator for more information about inflation or to do calculations involving inflation.
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Retiring At 55 With Two Million Summary
As you can see, if you want to retire using a traditional retirement withdrawal method, youll just need to see if the withdrawal of 2% to 4% plus any other income sources cover your lifestyle expenses.
This will help you see if it seems likely youll have enough money to cover expenses live as long as you think youll live, which is of course another factor beyond your control.
The other huge factor will be how the economy and related stock market perform right before and after you retire. Unfortunately, we have no control over this.
Or you can take a more proactive approach and generate higher investment income, or use one of the other more alternative income methods presented here to lessen the likelihood of running out of money in retirement.
Theres no doubt 2 million dollars is a lot of money, but it sure wont buy what it would buy in the past. Not only this, but if the 2 million is invested in assets that are subject to market risk, the 2 million can become 1.5 or 1 million without proper risk management. This is problematic for retirement withdrawals.
Want 33 income streams, 49 ways to lower risk, and 19 wealth building strategies that work even in your 50s? Theyre in my Utimate Wealth Plan. You can get it here now.
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Retirement Planning And Inflation
Inflation is the rising cost of consumer goods and services. In Canada it’s calculated using the consumer price index . TheCPI tracks how the price of more than 600 consumer goods and services purchased by Canadians changes over time.
In recent years, the average rate of inflation in Canada has been 2% per year. This means the cost of goods and services has been rising by 2% every year.
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Retirement Income Calculation Rules Of Thumb
When it comes to income required in retirement in Canada, there are several rules of thumb or schools of thought out there. If you are looking for a definite answer to put your mind at rest, you may be disappointed.
In fact, the one thing everyone readily agrees to is that when it comes to retirement income, it is not black and white and there is no 100% consensus.
Popular rules of thumb include:
How Long Will My Retirement Savings Last
Estimate the strength of your savings.
Whether you’ve made it to retirement or you’ll soon be there, you can use this calculator to estimate how long your savings will last. There are a number of key factors, including your monthly spending and other sources of income, as well as the rate of return on your outstanding savings balance, the taxes you pay on withdrawals and the impact of inflation.
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Make Sure Your Portfolio Is Well
A portfolio with multiple asset classes allows you the flexibility to always have a piece of your portfolio doing well, or at a minimum holding up better, in an economic downturn. The secret to a successful retirement investment strategy is to always be willing to lean against the financial markets.
If the stock market keeps going up, you can take some gains when you need money. If stocks ever take a huge dive, use your cash and bonds to fund your living expenses. The sooner you realize your investment decisions in retirement should be more of a reaction to the current environment instead of trying to predict where it is headed, the better off you will be.
Start By Estimating Your Future Expenses
A 2020 survey from Schwab Retirement Plan Services found the average 401 participant thinks they’ll need $1.9 million to retire, a 12% increase from the previous year’s survey. Of course, many people in the U.S. aren’t investing enough to reach that savings goaland the income it brings.
To find out if your retirement income will be enough, you have to start by estimating your retirement expenses.
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Retirement Planning: Building Your Nest Egg
So where does that leave you? If you start work at 25, to build a $2 million nest egg by the time you reach 72, you have to sock away more than $5,677 per year, according to the investment goal calculator at buyupside.com.
It works out to a monthly savings amount of $453.31.
That’s definitely doable. The yearly savings of $5,677 would be merely 10% of a $56,770 annual salary. That’s not an pie-in-the-sky salary.
Find A Financial Advisor Who Discloses Risks And Makes A Plan
Can the Petersons have a comfortable retirement with $2 million? Most likely, yes. But they need to understand the risks involved, as little as they may be. Can you retire with $2 million? How about $1 million? Mitch Tuchman writing for Forbes says:
You can retire with a million dollars or any other amount by setting your sights on a goal and taking saving seriously. A well-designed investment portfolio will get you there, almost inevitably.
The key words here are that you need a “well-designed” investment portfolio. How do you get one of those? Sit down with a professional, make sure they consider as many variables as possible, and design a plan.
Take your time when you’re asking yourself if you can retire with any particular amount of money you can’t afford to get it wrong.
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