Can a Couple Comfortably Retire With $2 Million?
When it comes to retirement planning, most people chase a figure. This figure can differ for different people, but it does serve as a general guideline or target to achieve. A $2 million retirement nest egg may seem like an achievable goal. It may also seem like a sufficient retirement fund that can last you a lifetime. However, the reality may or may not be the same as you perceive.
Given the inflation rate, changing lifestyle needs, increasing life expectancies, tax rates, and more, the value of $2 million may not have the same weightage in the future as it does today. So, understanding its worth in the future is essential before you make a call. In addition, analyzing whether you need more or less money to cover your needs and financial responsibilities is also critical. If you have dependent children in retirement, you may need more money. However, if you are a couple with no other financial responsibilities, you can stick to such a figure as long as it covers your lifestyle needs. To get a fairly accurate assessment of how much money you will need to retire comfortably based on your lifestyle and financial needs, consult with a professional financial advisor who can advise you on the same.
If you are confused and wondering if 2 million is enough to retire for couples, here are some things you need to know before:
How much do couples need for retirement?
There is no fixed amount for the perfect retirement. However, the following tips can help you understand your unique requirements for retirement:
1. Assess your lifestyle and basic needs in retirement
If you refer to the data published by the U.S. Census Bureau, the median average income after retirement for ages 65 and above is $47,357, whereas the mean average income is $73,228. For ages 65 to 74, the median income is $56,632, and the mean income is $84,153. Now a retirement pool of $2 million can roughly offer you a yearly income of $80,000 with the 4% rule. According to this rule, you can withdraw 4% of your retirement nest egg every year. So, the $2 million figure may be suitable for maintaining a comfortable retirement. However, you cannot eliminate the fact that everyone’s retirement is different. Some people may be traveling, playing golf, or taking memberships in country clubs that cost a fortune, while others may be working part-time to stay busy, pursuing hobbies like gardening, spending time with their grandchildren, and doing other similar things that cost little or no money. The kind of retirement you foresee and wish to have will dictate the kind of money you should have in your retirement accounts. For instance, if you wish to live lavishly in a city with a high cost of living, such as New York City, you would likely need a large nest egg that can cover your health expenses, essential needs, luxurious habits, and other miscellaneous needs. The same lifestyle may cost you a lot less in a place like Missouri City. So, assessing your lifestyle needs is the first and most important step in determining whether or not you can retire with 2 million.
2. Calculate your pre-and post-retirement expenses
Your expenses before and after retirement may be drastically different from one another. Before you retire, you may have commuting expenses, dining out costs, education expenses for your children, healthcare expenses for you and your spouse, etc. After retirement, your children would likely be independent, so you would not have to worry about their needs. Additionally, you would not have to pay for gas to go to work or for the cab ride to work. However, your own health expenses may increase. You may need to hire household help as you grow old. You may even need long-term care if you fall sick. Socializing may decrease. However, travel may increase as a lot of retirees like to travel in their spare time in retirement. In order to find the answer to “can a couple retire on 2 million dollars”, you would need to assess these expenses and then determine whether or not such a sum can suffice for your needs. When calculating the costs of things in the future, you should also look at inflation. Inflation will impact healthcare, essential items, as well as non-essential items. So, using an inflation calculator can be helpful in arriving at a figure for your future goals.
Can a couple plan to retire with 2 million?
The simple answer is yes. However, the complex answer could depend on the situation. Assuming the following scenarios, $2 million can last differently for different couples:
Couple 1: Has a retirement nest egg of $2 million in stocks, bonds, Roth retirement accounts like the 401k and the Individual Retirement Account (IRA), etc. There are no mortgages on the house, and all the debts are clear. The children are settled and require no additional financial assistance from the parents. Additionally, the tax liability in retirement for the couple will be relatively low as Roth accounts are not taxed if withdrawals are made after the age of 59.5 years. Now, if the couple decides to wait till their full retirement age to withdraw their Social Security benefits, they would likely save more as their paycheck will increase. Assuming the fact that the couple has their own house, has no dependent family members, and has low tax liabilities due to Roth accounts, a nest egg of $2 million may be enough for them if they live in an area with a low cost of living.
Couple 2: Has a retirement nest egg of $2 million in stocks, bonds, traditional retirement accounts like the 401k and the IRA, etc. They have a mortgage on their house, and their children are still living with them. Moreover, since they have to support their children, the couple decides to withdraw their Social Security benefits before the full retirement age. This results in a considerable loss as they receive a relatively smaller paycheck. In addition to this, since the couple chose to invest in a traditional 401k and IRA, their withdrawals are taxed by the IRS. This further impacts their $2 million fund and renders it less valuable.
As you can see, several factors like liabilities, tax, and inflation can impact your retirement nest egg. How you use your money and whether you choose to invest it will also dictate the final outcome. Moreover, the market fluctuations, duration of your retirement, the time of your retirement, etc., will play an equally crucial role. For instance, if you retire now, you would have to tackle an 8% inflation rate. Usually, the inflation rate in the United States fluctuates around 3%. The 8% hike has been unprecedented and is most likely to go down in the future. But these things can occur anytime and impact your retirement savings. Retirees retiring now are severely affected by the crashing stock markets too. So, if you are planning to retire right now in a climate where stock prices are falling, and inflation is through the roof, your $2 million retirement fund will likely not last you as long as you hope it to.
How to save the right amount for retirement
Here are things that can help you save the right amount for your retirement:
1. Evaluate your financial goals
Understand your goals in retirement and the kind of money you would need to fulfill them. For instance, do you wish to travel extensively or just relax at home? If you prefer the former, you may have to pay for an RV, gas, flight tickets, visas, etc. This can be a costly affair. However, if you wish to stay at home, your expenses will actually be a lot lower than they were before retirement. Sometimes couples pursue different interests after retirement. One may like to be up and about, while the other may like to relax. These things can also impact different people in different measures.
2. Understand and control your spending habits
Couples that are savers can use a retirement fund of $2 million dollars for a longer time than couples who are spendthrifts. This is why understanding your spending habits is also critical when it comes to planning for your retirement. If you and your partner find it hard to control your expenses, you may need to save more than your peers to keep up with your requirements. However, if you are innately savers who prefer living frugally, you can suffice with a relatively smaller retirement nest egg.
3. Invest in inflation-beating instruments
It is important to pick investments that can deliver inflation-beating returns over time. For instance, stocks have historically proven to provide relatively higher returns than several other categories of investments. Therefore, you can consider investing in them to build a retirement fund that can deliver returns in tandem with inflation. Additionally, you can diversify your investment portfolio to reduce risk and include different asset classes, market capitalizations, sectors, and industries in your portfolio.
4. Plan your finances in advance
Instead of leaving things to the later years of your life, you can take charge of your life now. If you want to retire with 2 million, or any other amount for that matter, you need to start saving for it from a young age. Your 20s and 30s can be critical in helping you save for your future. No matter how much you earn or how little you save or invest during these years, they can give you an edge over others. So, try to start retirement planning from a young age. Besides, it can also help to plan how you wish to spend your retirement and what your retirement signifies for you. If you are a believer in the FIRE (Financial Independence, Retire Easy) movement, you may need far more than a $2 million nest egg. However, if you plan to retire in your 70s with roughly 20 years of retirement, you may get by with such a figure. Irrespective of what you decide, giving yourself enough time to plan for your preferred idea of retirement is essential.
5. Save at least 75% to 80% of your pre-retirement income
Another general rule that you can follow when planning for retirement is to save at least 75% to 80% of your pre-retirement income. This can offer you a more customized approach to financial planning that would be suited to your unique lifestyle. Typically, your retirement expenses are lower than your pre-retirement expenses, as your responsibilities will drastically drop in your golden years. A major portion comes from no longer having to cover the expenses of your children, as it is normally assumed that they would be financially independent by then. A sum that is estimated to be at least 75% of your income before retirement can suffice for most of your expenses later. So, you can use it as a figure to create a target.
6. Plan your withdrawals
Withdrawals after retirement are often a neglected part of a retirement plan. If you are wondering is 2 million enough to retire for couples, you would also need to account for your withdrawal strategy to answer this question. If the couple withdraws a big chunk of their retirement savings in the initial years of retirement, they will likely run out of funds in their lifetime. However, if they plan their withdrawals prudently, they may be able to live off the $2 million for a lifetime. You can discuss withdrawal strategies with a financial advisor and consider delaying your Social Security benefits until the full retirement age or later, planning Required Minimum Distributions (RMDs) smartly to avoid a high tax bracket, etc. Remember that how you use your money is as important as how much you save and how you save it.
If you want to retire with 2 million, you may first consider your lifestyle, health status, habits, likes and dislikes, etc., and then devise a plan. It is important to understand that everyone’s needs are different and what suits you may not suit the other person, including your spouse. So, having an honest conversation about how you both foresee your retirement and how you wish to spend it is crucial.
Once you have taken note of each other’s needs and financial goals, you can go ahead and hire a financial advisor who can assist you in picking the ideal retirement target. Use the free advisor match service to match with 1-3 vetted financial advisors that can help you with your unique financial needs and goals.