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This Is What Your Lifestyle Could Look Like if You Retire at 55 With $2.5 Million Bucks

This Is What Your Lifestyle Could Look Like if You Retire at 55 With .5 Million Bucks


can I retire at 55 with 2.5 million

It’s probably possible for most people to retire at age 55 if they have $2.5 million in savings. The final answer, however, will depend on the interaction between various factors. These include your health, planned lifestyle and expenses in retirement, as well as how you invest your nest egg. Some factors, such as choosing a lifestyle or investment strategy, are predictable or controllable. Others, like health and life expectancy, are less so.

A Financial Advisor can help you develop a viable retirement strategy.

Is it possible to retire at 55 with $2.5 million?

Retiring at age 55 with $2.5 million is certainly achievable, as evidenced by the fact that it’s far more than the vast majority of people have when they stop working. Just about 1 in 10 retirees have even saved $1 million, according to the Federal Reserve’s Survey of Consumer Finances. If more than 90% of people can retire with much less than $2.5 million, chances are that will be enough for you.

A $2.5 million nest egg could generate $100,000 in income per year if you operate your accounts at the widely cited 4% rate. sustainable weaning rate. This rule states that withdrawing this percentage from your accounts each year will allow a nest egg to last at least 30 years.

Will your income be enough?

An annual income of $100,000 is well above average salary of $60,944 earned by people aged 55 to 64 who are still working. And many retirement planners suggest using 70% of earnings before retirement as a starting point when budgeting for retirement expenses. Seventy percent of $60,944 equals $42,661. With that in mind, $100,000 a year is probably more than enough income for a typical single retiree or even a married couple. Even if we use the 90% income replacement figure, which is at the high end of the range used by retirement planners, $100,000 is not far off the mark.

Using the safe withdrawal rate is not the only strategy. Retirees can generate income by investing in fixed income securities, dividend stocks And annuities. These income-oriented investment strategies, pursued separately or in combination, can potentially return 4% or more per year. If successful, this approach allows a retiree to maintain their lifestyle without withdrawing from their basic nest egg, potentially allowing it to last indefinitely and leave a financial legacy to heirs or charitable causes.

If you are ready to be matched with local advisors who can help you achieve your financial goals, start now.

Accounting for taxes

Taxes are a difficult factor to predict, varying in importance primarily by location and source of income. For example, eight states have no income tax and seven others do not tax retirement income.

California, the largest state by population, taxes retirees’ income, including withdrawals from retirement accounts, as regular income. THE SmartAsset Calculator for California Retiree Taxes states that a single person born in 1968 will pay $5,520 in income tax on $100,000 of taxable income in California.

The federal income tax may take another portion, depending on the source of the income. The withdrawals of a Roth IRA for example, they generally won’t owe federal income tax. Investment income and withdrawals from any type of retirement account are not subject to payroll taxes. However, withdrawals and investment income of $100,000 may be due long-term capital gains taxes 15% or $15,000.

In this simplified hypothetical example, the combined effect of state and federal taxes on a California retiree with $100,000 in retirement income would leave $79,480 in after-tax income. Deductions and credits would likely adjust the after-tax income of most retirees upward. The unadjusted remainder is well above the standard replacement income of 70% for a single retiree, but could be significantly less than a couple’s needs.

What could go wrong?

can I retire at 55 with 2.5 millioncan I retire at 55 with 2.5 million

can I retire at 55 with 2.5 million

Health costs represent a factor that is difficult to quantify in advance and could potentially modify these results. A Employee Benefits Research Institute One study found that a 65-year-old couple with typical prescription drug spending would need $318,000 in savings to be 90% sure of covering their healthcare costs in retirement.

If you set aside $338,000 of $2.5 million to cover healthcare costs, the remaining $2.182 million will allow for a safe withdrawal of just $87,280 before taxes. And this hypothetical example doesn’t include health costs from ages 55 to 65. Since Medicare coverage is not available until age 65, paying for health care costs for a decade using private health insurance or other resources could significantly increase the exclusion rate. out-of-pocket costs beyond this level.

Rules governing withdrawals from tax-advantaged retirement accounts could also be a problem. Until age 59.5, withdrawals from most types of accounts will result in most people paying not only the income taxes due, but also an additional 10% penalty. This would reduce the purchasing power of your withdrawals until you reach the age limit.

Inflation, another potential problem, reduces the purchasing power of a retiree’s income. For example, if inflation reaches the rate of 2%, the goal of Federal Reserve policymakers, this would reduce purchasing power from $100,000 in the first year to $98,000, $96,040 in the second, and so on. following.

This hypothetical example of inflation, however, does not take into account all factors. For example, interest rates often rise when inflation rises. This could cause income from an income-earning investment portfolio to increase about as fast as inflation reduces purchasing power.

Finally, 62 is the youngest age at which most people can begin receiving Social Security benefits. Social security contributions, which on average $1,827 per month in 2023, can go a long way toward paying for living expenses in retirement. The need to wait for the certainty of receiving those monthly Social Security checks is likely one of the biggest reasons more people aren’t retiring at age 55.

Conclusion

can I retire at 55 with 2.5 millioncan I retire at 55 with 2.5 million

can I retire at 55 with 2.5 million

A retirement account containing $2.5 million will likely fund a secure retirement for most retirees. Whether it works for you depends on how much you plan to spend in retirement, the type of investment strategy you choose, and some important, less controllable factors, including future health care costs and overall life expectancy. . However, given that this is far more than most people have at any age to retire on, a $2.5 million nest egg is a strong indicator that you can retire with confidence at 55 years.

Retirement Planning Tips

  • The combination of uncertainty about the future and the wide range of potential strategies can make effective retirement planning difficult without the help of a financial advisor. Smart assets free tool connects you with up to three financial advisors who serve your area, and you can survey your advisors for free to decide which one is best for you. If you are ready to find an advisor who can help you achieve your financial goals, start now.

  • Even if you can’t know exactly what will happen between now and retirement, SmartAsset’s solutions retirement calculator can help you produce a reasonable forecast. To use it, enter your information, including your location, income, the age you plan to start receiving Social Security benefits, the amount of your current monthly savings, and other information. The calculator will tell you how much income you’ll likely need in retirement, how much you’ll pay into Social Security, and how much you’ll need to have saved by the time you stop working.

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