How To Save 2.5 Million For Retirement

How Much Do You Really Need To Retire

Of course, most people won’t need to save $2.5 million to have a comfortable retirement. But figuring out how much you should squirrel away can be challenging.

Fidelity estimates most investors require about eight times their ending salary to increase the chances that their savings will last during a 25-year retirement. But every retirement is different. People also tend to spend lavishly in their first years of retirement before their spending declines in later years.

Health care is the wild card in retirement planning, especially as Americans live longer. Fidelity projects a 65-year-old couple retiring will need an average of $220,000 to cover medical expenses in retirement.

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A financial plan will help you estimate how much you will need to save. “Without a plan, it’s like being in dense fog. You can’t see the end goal and there is no clear path how to get to your goal,” said Andy Tilp, a certified financial planner and president of Trillium Valley Financial Planning near Portland, Oregon.

Tilp also recommends those close to retirement factor in the potential costs of long-term care. “Not everyone will require long-term care, but it is good to know the impact of the addition expenses. We look at whether they can afford to self-fund, or whether they should consider long-term care insurance,” he said.

How To Calculate Retirement Savings

A great way to remember how you need to save up for retirement is the 4% rule. Take your desired annual retirement income and then divide it by 4 percent. For example, let us say that you want to travel in retirement, so you want a retirement income of $100,000 per year. Using the 4% rule, youll find that you need to build up a nest egg somewhere in the ballpark of $2.5 million.

Case Study : $2 Million Portfolio With $5000 After

In scenario three, Joe and Mary withdraw $5,000 per month from their $2 million portfolio. This is an increase of 25% from case study 2.

This is income they will need above and beyond any other sources such as social security or pensions. The money must last until they each reach age 95.

Here are some additional assumptions for case study 3:

• Portfolio value: $2 million dollars

• After-tax portfolio income per month: $5,000

• Retirement age: 60

• Retirement start date: January 1, 2022

• Retirement time horizon: 35

• Portfolio mix: 60% stocks 40% bonds

Case study 3 depicts a higher monthly income for Mary and Joe. By taking $5,000 after-tax each month, the likelihood of that money lasting 35 years continues to decline.

In this case, spending more money brings the probability of running out of money down to 69%! This is a huge drop from Scenario 2 which is 87%.

The 18% difference is nothing to scoff at and can have a huge impact on their ability to make their savings last.

Figure 3

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The $25 Million Retirement Question Every Gen Xer Needs To Answer

Ever wondered how much money you’ll need to retire?

Prudential recently asked that question of hundreds of workers in Generation X, as part of a retirement preparedness study. The average estimate? A cool $2.5 million in savings.

That number will inevitably be a little inaccurate. But whether it’s pretty close is a question you absolutely need to ask yourself. Personally, I think it probably is. Here’s why.

Image source: Getty Images.

Increase Your Savings Rate Year To Year

Saving 10% to 15% of your income is a commonly accepted rule of thumb for retirement planning. But saving that amount may not be enough if youre trying to reach $2 million in assets by the time retire. Instead, you may need to save 20%, 30% or even more of your income to hit the target. If you cant afford to invest that much of your income now, you can increase your savings rate year to year. For example, if youre saving in a 401 and you get a 2% pay raise each year you can divert that extra 2% to your retirement account. Or as you pay off debts, you can redirect the money you were using for those payments to your online brokerage account.

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Jonathan H Todd Of Jonathantoddcom

Jonathan is a Chartered Financial Analyst, hes also a data analyst and author at NerdWallet. He writes articles that help readers make sense of the current economy and how it affects regular investors.

How much do you need for retirement and why?

The traditional rule of thumb is to replace 80% of your income, but Im planning to replace 100% of my income for two reasons:

• Saving 80% of your income is hard enough, so if you aim to save higher, youre likely to save more.

• Transitioning into retirement is easier if you save more when youre still working

He also explained how saving more of your annual income will make your retirement transition easier.

If you only save 10% of your annual income, youll be used to spending 90% of your income during your active years. But if you save 20% of your income, youll be used to living off 80% of your salary.

Saving more means youre more likely to hit your retirement goal, and youll be more adjusted to the decreased spending during retirement.

What conservative investment option can you recommend to a friend whos afraid of risk?

For a millennial like me, the definition of risk is different compared to somebody closer to retirement. For people my age, the bigger risk isnt investing in conservative investment options, its NOT saving enough.

Its risky to invest too much in bonds or other low risk assets, because those equal to lower returns.

It’s Not About Money It’s About Income

One important point when it comes to determining your retirement“number” is that it isn’t about deciding on a certain amount of savings. For example, the most common retirement goal among Americans is a $1 million nest egg. But this is faulty logic.

The most important factor in determining how much you need to retire is whether you’ll have enough money to create the income you need to support your desired quality of life after you retire.

Will a $1 million savings balance allow you to create enough income forever? Maybe, but maybe not. That’s what we’re going to determine in this article.

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How Much Do You Need To Retire

According to NerdWallet.com, the average person will need $1.73 million in their retirement. This amount can come from your retirement savings, investments, social security, and passive income, to name a few options. Most experts say that you should plan on earning 70 to 90 percent of your current income. For example, let us say you will earn $70,000 per year before retiring. In that case, plan on earning between $49,000 to $63,000 per year from retirement savings and Social Security. This retirement earning target will depend on things like your health status and lifestyle choices. For instance, if you want to live out your retirement years lavishly, you should plan to earn even more.

Brian Davis Of Sparkrentalcom

Brian is the Co-founder and Lead Real Estate and Personal Finance blogger at Spark Rental. He has 15 rental properties, and also provides free video training about earning passive income through rentals at SnapLandlord.com

How much do you need for retirement and why?

I aim to have $750,000 for retirement. Because I own several rental properties, about $500,000 of my retirement money would go to paying off my mortgages. But after that, the rental income would be enough for me to live on indefinitely. I also have about $250,000 in equities, purely for diversification and risk management.

What conservative investment option can you recommend to a friend whos afraid of risk?

Real estate investments can be extremely low-risk, but like any other kind of investment, people with no experience can lose a lot of money.

Brian is quick to admit that he teaches real estate investing for passive income, so hes partial to it.

He continues, Rental properties can be purchased with very predictable returns, for people who know how to calculate them. Its not hard to do, its finding good real estate deals that takes time and work, unlike index funds that take no work but leaves you no control over returns.

Real estate, can be a conservative investment, according to Brian, but it all depends on the investors knowledge and willingness to learn.

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Phil Risher Of Youngadultsurvivalguidecom

Phil paid of $30,000 in student loans in 1 year with a $48,000 annual salary. After that he bought his first house with cash when he was just 25 years old.

How much do you need for retirement and why?

I project that I need $700,000 to get $42,000 at a 6% annual return.

He thinks this amount is enough because he plans to live a debt-free lifestyle before and during retirement.

What conservative investment option can you recommend to a friend whos afraid of risk?

I dont make recommendations on investment because everyone is different, and I tend to only look at risky options.

Tips For Retirement Planning

• Consider talking to your financial advisor about strategies you can use to save $2 million for retirement. If you dont have a financial advisor yet, SmartAssets financial advisor matching tool can help you find one. You just need to answer a few brief questions to get personalized advisor recommendations for your local area. If youre ready, get started now.
• One essential key to reaching your financial goals for retirement is to make sure youve got the right mix of asset types. Thats where a free asset allocation calculator can come in handy.

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Can You Live Off Monthly Interest On 2 Million Dollars

For some, the plan is to retire and take only the interest on that savings. Living off interest of 2 million dollars is doable, but youll need a reliable, high-earning investment vehicle. A fixed annuity can give you even more interest than a CD, at 3 percent or more, offering more confidence in how long will 2 million last in retirement.

The Benchmarks For Those Closer To Retirement

The range gets wider as you get older, so we also provide more detailed estimates for people approaching retirement. This helps someone find a realistic target based on income and marital status, which affect Social Security benefits.

A Closer Look at Savings Benchmarks Later in Your Career

Assumptions: See Savings Benchmarks by AgeAs a Multiple of Income above. Dual income means that one spouse generates 75% of the income that the other spouse earns.

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Income Generated From A $25 Million Retirement Super Balance

First lets look at various scenarios for a couple with a combined balance of $2.5 million on retirement.

Couple: Retiring at 60

The following scenarios are for a single person with a retirement super balance of $2.5 million.

Assumptions

• You own your own home and have personal assets of $25,000 or less. These calculations do not allow any investment assets outside super. Note that the amount of investment assets you have can greatly affect the amount of Age Pension you are eligible for.
• You retire after you reach Age Pension age.
• You are eligible for the Age Pension .
• Calculations for couples assume both are same age and super balance is split evenly.
• All returns are net of fees.
• Results are in todays dollars. Inflation costs are a 2.5% rise per year in cost of living, plus a 1.5% additional rise per year in living standards.
• We recommend you also review the assumptions that MoneySmart list below their calculator.
• Calculations were made in May 2022.

SuperGuide

Jacob Lumby Of Cashcowcouplecom

Jacob Lumby is the Content Director and one of the trios who run Cash Cow Couple. With his wife, Vanessa, they teach other married couples how to save money, pay off debt, and build a stable financial future.

How much do you need for retirement and why?

I would feel comfortable retiring with $1 million in available assets. Using 3% as a conservative withdrawal rate, a $1 million portfolio will produce $30,000 a year. That amount will be enough to cover all of our expenses because of our minimalist lifestyle.

What conservative investment option can you recommend to a friend whos afraid of risk?

Risk and rewards are inseparable for investors. Low-risk investments dont offer large potential returns. But there are options for people less comfortable with investment risks.

Real estate is more stable compared to stocks, and firms like Fundrise make it easy to invest in commercial real estate offerings without excessive fees.

Jacob also suggested short-term bond funds as a conservative investment option, for investors who think real estate isnt for them.

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Set A Retirement Goal

If you did your homework by calculating how much money youll need to have saved by retirement, then youve already completed step one. No matter how hefty the amount may seem, the first step is to come up with a concrete number so that you can work backward and come up with a plan on how youll get there.

Dont forget to consider other sources of income that might ease some of your savings burdens, such as inheritances or passive income streams. However, you should only count on income sources that you can depend on. Its better to be safe than sorry and wind up with extra income than you had planned on.

How Much Do I Need To Retire

How much money do you need to comfortably retire? $1 million? $2 million? More?

Financial planners often recommend replacing about 80% of your pre-retirement income to sustain the same lifestyle after you retire. This means that, if you earn $100,000 per year, you’d aim for at least $80,000 of income in retirement.

However, there are several factors to consider, and not all of your income will need to come from savings. With that in mind, here’s a guide to help calculate how much money you will need to retire.

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Jon Dulin Of Moneysmartguidescom

Jon started investing in stocks when he was 18. But that didnt mean he was free from financial struggles. He lost $25,000 during the housing bubble and once owed $10,000 in credit card debt.

His portfolio has grown over $700,000, and he now shares the strategies and lessons he used to get out of debt and grow a sizable portfolio.

How much do you need for retirement and why?

Jon and his wife want to retire early and live up to age 95, which means they need to save a lot of money for a long retirement.

Using a Monte Carlo simulator, we came up with a $3 million retirement goal that already factors in our savings and retirement expenses. But we didnt include Social Security because were not sure if it will still be around by the time we retire.

What conservative investment option can you recommend to a friend whos afraid of risk?

Invest in a balanced mutual fund that puts 60% of your money into stocks and the remaining 40% into bonds.

A high bond allocation protects you from stock market dips. But you wont enjoy market surges either. If your goal is consistency and stability, this is a sensible strategy.

Jim Poolman Of Indexedannuitiesinsightscom

Jim is the Executive Director of Indexed Annuity Leadership Council and former insurance commissioner of North Dakota. The IALC provides comprehensive and accurate information about the use of indexed annuities.

How much do you need for retirement and why?

With healthcare costs likely to exceed more than $250,000, I, like many baby boomers, will need more than $1 million to retire comfortably.

Like the other financial experts in this article, Jim also considered his cost of living, and dreams of travel when he calculated his retirement goals. He also used retirement calculators to make the process easier.

He continues, I like the calculator at FIAinsights.org because it allows you to hone in on specific aspects of retirement planning. You can get a retirement number or plan thats specific to your situation after answering a few questions.

What conservative investment option can you recommend to a friend whos afraid of risk?

The best approach is to balance your portfolio. Look into a fixed indexed annuity, which provides increased sustainability while mitigating external risks to your investment. The market may swing, but your principle investment will be protected.

The fixed indexed annuity he recommended also provides a guaranteed lifetime income, so theres no risk of outliving your earnings. Be warned though, investments like this are usually expensive.

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Think Through What Other Goals That Your Family Have In Mind That Remains Unfunded

Since you may not be having that good paycheck anymore, it may be prudent to take like a week to think through whether there are some goals/liabilities that have not been accounted for.

For example, the needs of parents may be one.

A third party like myself can only help trigger you to think about this area but it would be challenging for me to cover everything here.