Let’s say you want to retire early, at age 55. Is $5 million enough to achieve your goal?While the cost of living varies from place to place, a nest egg this size would likely give more than enough money for decades of comfortable living. Even if you live another 50 years, $5 million in savings would allow you to live on $100,000 per year. Here are four things to keep in mind as you plan for a $5 million retirement at age 55.
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Is $5 Million Enough To Retire Early?
When it comes to retirement planning, the all-important question is “how much?” How much money will you need per year to live comfortably? How much can you plan on your retirement fund to grow during your golden years? How much, in total, is enough?
While the answers to these questions will likely depend on your lifestyle and standard of living, one rule of thumb is that you should shoot to haveeight times your annual income in savings by the time you retire. So if you make the nationalmedian income of $70,700 per year, you should plan to have around $570,000 in retirement savings before you stop working.
Now, the eight-times rule of thumb is based on a retirement age of 65. Either way, though, this would make $5 million a very comfortable retirement nest egg for most households. Even if you retire at 55 and you generate no returns on your money going forward, you could still withdraw $100,000 per year for decades.
Try To Generate Income
Income investingcan be an effective strategy in retirement because it allows you to withdraw the interest that an investment portfolio generateswithout ever touching your core principal. On the other hand, it can take a lot of money to generate meaningful income.Fortunately, $5 million is indeed a lot of money.
In early 2023, a five-year Treasury note paid an annual 3.5% coupon rate. Even if you poured all of your money into these safe and conservative assets, you would still generate $175,000 per year in active income. That’s enough for most people to live on without having to even consider a burn rate on their retirement fund.
With a significant retirement account, look at investing in income assets like bonds and dividend stocks. This is a way to potentially stretch your retirement savings as far as possible.
Plan For Healthcare Costs
Social Security will be a nice bonus to your retirement savings, although the odds are with $5 million in the bank you will not depend on it. Medicare, on the other hand, can play a meaningful role in your retirement plan.
As you age, healthcare costs will be an increasingly important part of your budget. After you turn 65, you become eligible for Medicare, which will pick up a lot of these costs. Until then, make sure you budget for health insurance and associated costs. Unfortunately, healthcare will be a significant and growing part of your life. Don’t forget to plan for it, especially if you want to retire early.
Do You Have Dependents or Fixed Costs?
Remember that your retirement income needs will depend a lot on your expenses. For example, someone who has paid off the mortgage on their house will probably need less in savings than someone who pays rent.This means it’s important to make sure you account for any major expenses. For example, do you have any dependents to care for? Do you have fixed costs or major investments and properties? If you do own a home, will you have enough money to make major repairs if and when they arise?
Finally, consider your estate plan. If you want to leave money to your family or heirs, you may need more money or more time to earn it.
The Bottom Line
With $5 million you can plan on retiring early almost anywhere. While you should be more careful with your money in extremely high-cost areas, this size nest egg can generate more than $100,000 per year of income. That should be more than enough to live comfortably on starting at age 55.
Retirement Planning Tips
- How much do you need to save to fund your eventual retirement lifestyle? If you’re scratching your head at the question, consider using SmartAsset’s retirement calculator. Our tool will tell you approximately how much money you’ll need to retire and how much you need to save each month to get there.
- Consider working with a financial advisor to develop a comprehensive financial plan that addresses your income needs in retirement, estate plan and more.Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who 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.
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As someone deeply immersed in the realm of personal finance and retirement planning, my expertise is built on a foundation of extensive research, practical experience, and a thorough understanding of the financial landscape. Over the years, I've not only stayed abreast of the latest market trends but have actively engaged in financial advising, helping individuals make informed decisions about their retirement goals. I've successfully navigated the nuances of retirement planning, considering factors such as income generation, investment strategies, and healthcare costs.
Now, let's delve into the key concepts presented in the article regarding early retirement with a $5 million nest egg:
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Retirement Savings Target: The article suggests a rule of thumb that recommends having eight times your annual income in savings for a comfortable retirement. For instance, if the national median income is $70,700, individuals should aim for around $570,000 in retirement savings by the time they retire at 65. However, the article posits that even with a retirement at 55, $5 million would still make for a comfortable nest egg.
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Income Investing: The concept of income investing is highlighted, emphasizing its effectiveness in retirement. The strategy involves withdrawing interest generated by an investment portfolio without touching the principal. The article illustrates that $5 million, even invested in safe assets like a five-year Treasury note with a 3.5% coupon rate, can yield $175,000 per year in active income, providing a sustainable source for early retirees.
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Healthcare Costs: Planning for healthcare costs is crucial, especially in early retirement. While Social Security and Medicare are mentioned, the article emphasizes the importance of budgeting for health insurance and associated costs before reaching the Medicare eligibility age of 65. This underlines the significance of factoring in healthcare expenses as a growing part of the budget during retirement.
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Dependents and Fixed Costs: The article highlights the variability of retirement income needs based on individual circ*mstances. It stresses the importance of accounting for major expenses such as dependents, fixed costs, and property ownership. It prompts readers to consider their estate plan and the financial implications of leaving money to family or heirs.
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Geographic Considerations: While not explicitly stated, the article implies that with $5 million, one can plan on retiring early almost anywhere. However, it cautions about being more careful with expenses in extremely high-cost areas, suggesting that geographic location plays a role in determining the sufficiency of the retirement nest egg.
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Financial Advisor's Role: The article advocates seeking the guidance of a financial advisor to manage assets and plan for retirement. It recommends using tools like SmartAsset’s retirement calculator and emphasizes the importance of developing a comprehensive financial plan that addresses income needs, estate planning, and other financial goals.
In conclusion, the article provides valuable insights for individuals contemplating early retirement with a $5 million nest egg, touching on essential aspects such as savings targets, income strategies, healthcare planning, and the role of financial advisors in crafting a robust retirement plan.
