It probably is possible for most people to retire at age 55 if they have $2.5 million in savings. The ultimate answer, though, will depend on the interplay between various factors. These include your health, your anticipated retirement lifestyle and expenses, and how you invest your nest egg. Some factors, such as choice of lifestyle or investment strategy, are predictable or controllable. Others, such as health and life expectancy, are less so.
A financial advisor can help you devise a workable retirement strategy.
Is Retiring at 55 with $2.5 Million Possible?
Retiring at 55 with $2.5 million is certainly feasible, as evidenced by the fact that this is far more than the vast majority of people have when they stop working. Only about 1 in 10 retirees have even $1 million saved, according to the Federal Reserve’s Survey of Consumer Finances. If more than 90 percent of people can retire with far less than $2.5 million, it’s likely that will be enough for you.
A nest egg of $2.5 million could generate $100,000 in income per year if you tap your accounts at the widely cited 4% sustainable rate of withdrawal. This rule forecasts that withdrawing that 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 the average salary of $60,944 earned by people aged 55 to 64 who are still working. And many retirement planners suggest using 70% of pre-retirement earnings as a starting point when budgeting for spending in retirement. Seventy percent of $60,944 is $42,661. With that in mind, $100,000 a year is likely more than adequate income for the typical single retiree or even a married couple. Even if using the 90% income replacement figure that 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 isn’t the only strategy. Retirees can generate income by investing in fixed-income securities, dividend-yielding stocks and annuities. These income-oriented investment strategies, pursued separately or in combination, can potentially yield 4% or more per year. If successful, this approach permits a retiree to maintain their lifestyle without withdrawing from their core nest egg, potentially enabling it to last indefinitely and leave a financial legacy to heirs or charitable causes.
Accounting for Taxes
Taxes represent a hard-to-predict factor which varies in importance depending primarily on location and source of income. For instance, eight states have no income tax and seven more don’t tax retirement income.
The largest state by population, California, taxes retiree income including retirement account withdrawals as regular income. The SmartAsset calculator for California retiree taxes indicates a single person born in 1968 will pay $5,520 in state income taxes on taxable income of $100,000 in California.
Federal income taxes may take another portion, depending on the source of the income. Withdrawals from a Roth IRA generally won’t owe federal income tax, for example. Investment income and withdrawals from any type of retirement account don’t incur payroll taxes. However, withdrawals and investment income of $100,000 may owe long-term capital gains taxes of 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 likely would adjust after-tax income upward for most retirees. The unadjusted remainder is well above the standard 70% replacement income figure for a single retiree, but might be significantly below a couple’s needs.
What Could Go Wrong?
Healthcare costs represent a factor that is difficult to quantify in advance and that could potentially change these results. An Employee Benefits Research Institute study found that it would take $318,000 in savings for a 65-year-old couple with typical prescription drug expenses to be 90 percent sure of covering their health expenses 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 amount of just $87,280 before taxes. And this hypothetical example doesn’t include healthcare costs from 55 to 65. Given that Medicare coverage doesn’t become available until age 65, paying for health costs for a decade using private health insurance or other resources could significantly increase the out-of-pocket costs beyond that level.
Rules governing withdrawals from tax-advantaged retirement accounts could also pose an issue. Until age 59.5, withdrawals from most types of accounts for most people will involve paying not only any income taxes due but an additional 10% penalty. This would cut into the spending power of your withdrawals until you reach the cutoff age.
Inflation, another potential problem, reduces purchasing power of a retiree’s income. For example, if inflation runs at the 2% rate that is the target of Federal Reserve policymakers, it would reduce the purchasing power of $100,000 tin the first year to $98,000, $96,040 in the second and so on.
This hypothetical inflation example doesn’t account for all factors, however. For instance, interest rates often rise when inflation rises. That could cause income from a portfolio of interest-earning investments to increase about as fast as inflation reduces purchasing power.
Finally, age 62 is the youngest age most people are eligible to begin receiving Social Security benefits. Social Security payments, which average $1,827 monthly in 2023, can go a long way to help pay living expenses in retirement. The need to wait for the certainty of those monthly Social Security checks is likely one of the biggest reasons more people don’t retire at 55.
Bottom Line
A retirement account containing $2.5 million probably will finance a secure retirement for most retirees. Whether it will work for you depends on how much you plan to spend in retirement, what kind of investment strategy you choose and some important, less-controllable factors, including future healthcare costs and overall life expectancy. However, given that this is far more than most people retire with at any age, a $2.5 million nest egg is a strong indicator that you can confidently retire at age 55.
Retirement Planning Tips
- The combination of uncertainty about the future and a wide array of potential strategies can make it difficult to plan effectively for retirement without the help of a financial advisor.SmartAsset’s free tool matches you with up to three financial advisorswho 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.
- Even if you can’t know exactly what will happen between now and retirement, SmartAsset’s retirement calculator can help you produce a reasonable forecast. To use it, enter your details including location, income, age you plan to start taking Social Security benefits, current monthly savings amount and other information. The calculator will tell you how much income you’re likely to need in retirement, how much Social Security will contribute and how much you need to have saved by the time you stop working.
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As a financial expert with a deep understanding of retirement planning and investment strategies, I can provide valuable insights into the concepts discussed in the article.
Firstly, the article explores the possibility of retiring at age 55 with $2.5 million in savings. The feasibility of this scenario is supported by statistical evidence, citing that only about 1 in 10 retirees have even $1 million saved, according to the Federal Reserve’s Survey of Consumer Finances. The $2.5 million nest egg is considered substantial, and the article suggests that it could generate an annual income of $100,000 if the 4% sustainable rate of withdrawal is applied.
The concept of the 4% sustainable withdrawal rate is a key element in retirement planning. It is a rule of thumb that suggests withdrawing 4% of the retirement savings annually, which is believed to allow the nest egg to last for at least 30 years. This rate is mentioned as a benchmark to assess whether an annual income of $100,000 from a $2.5 million nest egg is sufficient.
The article emphasizes the importance of considering various factors in retirement planning, including health, anticipated retirement lifestyle, and expenses. It acknowledges that some factors, such as lifestyle choices and investment strategies, are controllable, while others, like health and life expectancy, are less predictable. The recommendation is to seek the guidance of a financial advisor to devise a workable retirement strategy, highlighting the expertise needed in navigating these complexities.
Additionally, the article delves into the impact of taxes on retirement income. It notes that taxes, both at the state and federal levels, can significantly affect the after-tax income for retirees. The discussion includes examples of state income tax calculations, considering variables such as retiree income and location. This demonstrates the importance of understanding the tax implications of retirement income sources.
The article also explores alternative income-generating strategies beyond the 4% withdrawal rule. It mentions investing in fixed-income securities, dividend-yielding stocks, and annuities as potential strategies to generate income. This highlights the diversification of income sources as a crucial aspect of retirement planning.
Furthermore, the article addresses potential challenges and uncertainties in retirement planning, such as healthcare costs, early withdrawal penalties, and the impact of inflation. These factors underscore the need for a comprehensive and flexible retirement strategy that accounts for unforeseen circ*mstances.
In conclusion, the article suggests that a $2.5 million retirement account can likely finance a secure retirement, but success depends on careful planning, investment strategy, and consideration of uncontrollable factors. The expertise of a financial advisor is recommended to navigate the complexities of retirement planning and ensure a well-thought-out strategy.
