We’ve Saved $2 Million: Is That Enough to Retire at 65?
If you have $2 million invested towards your retirement, you’ve accomplished something most Americans haven’t. You’re likely right around the top 10% by net worth.
But here’s the problem: Being “ahead” of most Americans doesn’t mean you are ready to retire, even if you are sitting on a seven-figure nest egg.
For many 65-year-olds, $2 million might be more than enough to support their retirement goals.
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For others, $2 million might not.
When you have a $2 million net worth, you’re “ahead” of 90% of Americans and averages and comparisons stop mattering as much.
What matters is: Does your $2 million support your specific retirement goals?
$2 million, 2 very different retirements
Dave and Susan are both 65. They live in a $600,000 home with no mortgage. Their ongoing housing costs are limited to property taxes, insurance and maintenance.
Dave has a pension of $25,000 per year, and between their two Social Security benefits, the couple collects another $50,000 annually. That’s $75,000 per year in reliable, predictable income.
Dave and Susan want to spend about $115,000 per year, including income taxes. They have no credit card debt, their cars are paid for, and their travel plans consist of a couple of road trips each year to visit their grandchildren.
Because their guaranteed income covers $75,000 of their $115,000 lifestyle, Dave and Susan only need their $2 million portfolio to generate $40,000 of income per year. That’s an initial withdrawal rate of just 2% — half the percentage of the often quoted 4% rule.
That relatively low initial withdrawal rate gives them more flexibility to weather market downturns or unexpected expenses without immediately making significant changes to their lifestyle.
For Dave and Susan, $2 million seems plenty.
Mark and Karen are also 65. They live in an $800,000 home that has a $300,000 mortgage balance, in addition to property taxes, insurance and maintenance.
Mark and Karen were high earners during their careers, so their Social Security benefits will be substantial — nearly $70,000 combined.
Neither has a pension or any other source of reliable retirement income.
They want to live on $170,000 per year. In addition, they also plan to purchase a $1 million vacation home in Florida.
They are asking their $2 million portfolio to generate $100,000 every year to cover their annual spending budget, including a mortgage payment, at a 5% withdrawal rate.
According to Morningstar’s latest retirement spending research, the 5% portfolio withdrawal rate is within the range supported by a dynamic, or guardrail spending approach. These flexible withdrawal methods suggest a higher initial portfolio withdrawal if you’re willing to reduce your withdrawals when needed, based on the market or inflation.
But here’s where they might get into trouble.
Their $2 million will also have to produce the down payment for a second, million-dollar property, as well as cover a second set of mortgage payments, property taxes, utility payments and maintenance costs.
If they take out $400,000 total from their retirement nest egg for their down payment, including the income taxes due on their large traditional IRA withdrawal, that leaves them with $1.6 million.
Asking your $2 million portfolio to generate $100,000 income does fall within the ranges supported by some of the flexible spending strategies, but those approaches make assumptions, too, about your stock mix, retirement length and willingness to reduce withdrawals in times of market volatility or high inflation.
But asking your $1.6 million portfolio to generate $100,000 income is a 6.25% withdrawal rate, much higher than the percentages supported in the flexible withdrawal research — and that’s without accounting for the new mortgage from their vacation home.
With two mortgages now, Mark and Karen are running out of room to be flexible.
If the market drops, Dave and Susan have the room to cut back.
Mark and Karen, however, have to pay their monthly mortgage no matter how their investments perform. For them, $2 million seems like a stretch.
Two couples, both with $2 million dollars saved, with two very different visions for retirement. An account balance is only one part of a retirement plan.
What $2 million actually has to accomplish
When I meet soon-to-be retirees for the first time, they often worry that their investments need to replace their entire working salaries.
That’s almost never true.
Your retirement portfolio only needs to fill the gap between what you want to spend and what you already receive from other reliable income sources, such as a pension and Social Security.
The question is: How big is that gap? How much work will your portfolio need to do?
Let’s go back to Dave and Susan. Their gap was $40,000. With Dave’s pension and their Social Security benefits, they have a manageable initial withdrawal rate of 2%.
Meanwhile, Mark and Karen were asking for much more from their portfolio, at a 6.25% withdrawal rate.
Both sets of retirees had $2 million, but the right question isn’t “How does $2 million compare with the rest of America?”
The right question is, “Will $2 million be enough for me in my retirement?”
5 questions that determine if $2 million is enough
1. How much will you spend?
Don’t rely on a generic general rule that tells you to spend 70% or 80% of your pre-retirement income or withdraw 4% every year. Start instead with your current spending — that’s how much is going to your current lifestyle, and often you’d prefer to maintain your current lifestyle.
The easiest way to estimate your spending is to look at your current take-home pay. You’ll have to adjust for taxes and healthcare costs, but as I always say, “What goes into your checking account usually gets spent.”
2. How much guaranteed income will you make in retirement?
Every dollar of guaranteed income from Social Security or a pension is a dollar your portfolio doesn’t have to produce. If you’re able to optimize your Social Security and pension, you don’t have to rely as much on your investments in retirement.
3. How much money will you keep after taxes?
This largely depends on which types of accounts hold your money:
- Traditional IRAs and 401(k)s. Withdrawals are generally taxed as ordinary income.
- Roth IRAs. Qualified withdrawals are generally tax-free
- Taxable brokerage accounts. Long-term capital gains from investments held for more than one year are generally taxed at preferential federal capital gains rates.
- Cash savings. Withdrawals out of savings aren’t by themselves taxable, although the interest earned is reported as taxable.
Your choices on which accounts you withdraw money from, and when you withdraw that money will be a big determinant to how much taxes you pay each year.
4. How will you invest your money?
In retirement, you need both short-term money to pay your living expenses and long-term money that’s positioned for growth.
If your portfolio is exposed to too much market risk, you might feel uneasy about spending.
But if you’re not exposed to enough market risk to drive up long-term returns, your money might not grow enough to support you in the later years of retirement.
5. What type of legacy will you leave?
Think about our second couple, Mark and Karen, who were planning to buy a $1 million vacation home. While that might be a worthy goal, they need to consider how things work out if their projections don’t go as planned.
What’s their plan for long-term care expenses, or what happens if one of them passes away earlier than expected?
How will the surviving spouse deal with a lower income? What are the tax consequences to how their kids inherit their remaining money?
In my book, Retire Today, I show retirees how to coordinate their answers to these questions into a simple five-step master plan: Spend, Make, Keep, Invest and Leave.
Your account balances matter. But only after you understand what the money needs to accomplish can you create your own retirement master plan.
Is $2 million enough to retire at 65?
For many retirees, the answer is yes.
That’s a more likely yes if the lifestyle and spending needs you’re planning for in retirement are aligned with your Social Security choices, tax planning, investments and legacy planning.
But high-earners whose salaries are paying for an expensive lifestyle today might find that a $2 million portfolio can’t do all the work once their paychecks stop coming in.
Being ‘ahead’ doesn’t always count as ‘having enough’
Building a $2 million nest egg by age 65 puts you well ahead of most Americans.
But retirement isn’t about being ahead of your peers. It’s about having enough to support your lifestyle, your bucket list goals and your legacy.
So stop asking yourself, “Do I have enough compared with everyone else?”
Instead work on answering, “What does my money need to do for me in retirement?”
Once you answer that question, you’ll stop comparing your retirement with everyone else’s and start building the retirement that works for you.
