One of the most important stepping stones in achieving future financial security is planning for retirement. But, exactly how much money are you going to need when you retire? Everyone must face this question, yet there is no definitive or easy answer to it. Furthermore, there are always factors such as inflation and stock market performance that you can’t predict. So, if you want to know if $2 million is enough to retire, the answer is…it depends.
The facts show us that many people outlive their retirement savings. Advances in healthcare mean people are living longer and need to plan for more expenses. In the past, $2 million would have been enough for those who retire at 60. But, the way we plan for retirement and our needs have also changed. For some, this amount is more than plenty to see them through their golden years. But, for others, it barely scratches the surface.
Social Security Benefits
The first mistake people make is expecting their Social Security benefits to take care of all their expenses once they retire. Unfortunately, your monthly benefits only cover approximately 20-40% of the necessary income during retirement. And, if you begin taking your benefits as soon as you become eligible at age 62, you won’t receive your full benefits. When you start receiving them early, the total amount is reduced by a small percentage for every month you withdraw before reaching the full retirement age of 70. Therefore, many retirees delay taking their benefits as long as possible to maximize how much they will receive.
In addition to age, your monthly check for Social Security benefits will also vary based on your earnings record. If you want to get a clearer picture of how much you can expect from Social Security, you can use their online calculator. It provides a better estimate tailored to your personal history and financial situation. While there is no universal standard amount for Social Security benefits, there is one generalization that can be made. If you plan to retire by 60 and receive your benefits as soon as possible, you will need more income to sustain yourself through your retirement years.
Boosting a $2 Million Portfolio to Retire Early
Since pensions and Social Security only cover a portion of what you need to support yourself, many people invest to supplement their retirement income. The dividends and returns on your portfolio can bridge the gap for what you need to retire stress-free. However, the amount you invest and save for retirement will fluctuate according to several variables. Factors such as the lifestyle you plan to maintain, your monthly income, the growth rate of your investments, your investment strategy, life expectancy, taxation rates, additional income, and medical expenses all affect how much you will need to withdraw from your accounts annually.
Fortunately, there are financial and robo-advisors that utilize retirement calculators and simulators to determine your retirement planning goals. Their software can run thousands of possible outcomes for stock market returns. And, they can also alter these variables to determine which scenario has the highest probability to make your money last.
Asking the Right Questions
To set yourself up to successfully reach your financial goals, it’s important that you are asking the right questions. Instead of asking if $2 million is enough to retire at 60, you should be asking how you can make it happen. Shifting your perspective and changing the way you view your money will put you in the right mindset to turn your goals into your reality.
When you start thinking about retirement, here are a few important questions you should be able to answer before implementing your savings strategy.
1. What age can you feasibly retire?
The age you retire is a bigger factor than you might think. Early retirement is a great goal to set for yourself. However, you must also be realistic and understand when it is financially feasible to retire. If you got a late start to the investing game or have a substantial amount of debt, it may be more beneficial to wait a few years. The longer you have a steady salary coming in, the more time you have to contribute to your accounts. And, the more likely it will be that your savings will last through your retirement years. Additionally, the longer you delay taking your Social Security benefits as well, the more money you will receive.
2. How much will my monthly expenses and taxes be?
Another consideration is how much income you will need each month. If you plan to maintain a similar lifestyle to your current way of living, you can make an annual budget based on your current expenses. Although, if you plan to travel more, move somewhere else, or have unexpected medical expenses, it will impact how much you spend. Therefore, you should carefully consider the cost of living and taxation rates for where you want to retire. If it isn’t in your budget, then it’s time to reevaluate your plans or look for places that provide better benefits for retirees.
3. What happens if economic conditions change?
While most formulas and financial planners include inflation rates in the calculations, you can never predict when market conditions will change. If the markets experience a recession, it will severely reduce the funds in your retirement accounts. That’s why many people take a more conservative approach towards investing as they approach retirement age. Even though it is impossible to know when economic conditions will change, you can protect yourself against market fluctuations.
Planning for retirement is a necessary financial step we must all take. However, like most things in life, this is much easier said than done. If you feel in over your head, you aren’t alone. So, if you aren’t sure where to start, it’s probably time to consult with your financial advisor. They will help you evaluate your retirement needs and determine how far your supplemental income, additional support, and benefits will get you. Taking control of your financial future isn’t the easiest task, but it is possible with well-coordinated financial moves.
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Jenny Smedra is an avid world traveler, ESL teacher, former archaeologist, and freelance writer. Choosing a life abroad had strengthened her commitment to finding ways to bring people together across language and cultural barriers. While most of her time is dedicated to either working with children, she also enjoys good friends, good food, and new adventures.