Do you have enough money to retire?
There are many ways to look at this, but the most common is to simply break it down into money coming in and money going out. How much income can you earn from your retirement plan, and how much do you need to spend?
Now let’s say you have $1 million in your 401(k) or IRA and are expected to receive a Social Security payment of $2,500 each month. This is exactly the number. midrange Some of the possible benefits. Can I retire at the age of 65?
Well, it certainly depends on your standard of living. But for most people, the answer is yes. This should be enough to generate a comfortable income in most parts of the country. Think of it like this: (And if you need help creating your own retirement plan, Consider matching with a financial advisor.)
Calculating the income you need after retirement
The first point here is income. How much money can you expect in savings and Social Security? Since we already know your Social Security income, how much money will you make with $1 million in your pre-tax account?
The exact answer depends on how you manage your money in retirement. To understand that, let’s look at four possible investment options: cash, bonds, stocks, and annuities.
But before that, we need to consider the all-important issue of longevity risk.
long life risks
as the hill As recently pointed out, most people underestimate their longevity and therefore how long their retirement years will last. In fact, most people expect the average American to live to be 75 to 80 years old, and the actual life expectancy is 82 years for a man and 85 years for a woman.
The bottom line is that you want your money to last at least as long as you live, but most people tend to underestimate that number. So if you’re retiring at age 65, make sure you have a retirement plan that lasts at least 30 years. I’d like it to be longer if possible. After all, you want some good news on your 100th birthday.
You should also consider what savings and investment vehicles your portfolio is in. This is because it affects your rate of return and affects your retirement income. Consult a financial advisor Build a portfolio tailored to your specific needs.
cash: Holding money in cash means storing the entire amount in an instrument in a savings account or similar location. savings account or negotiable certificate of deposit. There are many issues here, but the biggest one is that even at the Federal Reserve’s base rate of 2%, these accounts are generally below the rate of inflation. This means you lose spending power over time.
In the case of cash, assuming 30 years after retirement, approximately $2,700 per month. ($1 million / 30 years = $33,333 / 12 months = $2,777) With $2,500 in Social Security, you’ll have about $5,200 in living expenses each month. This is a fairly comfortable income in most parts of the country, but the end date will also be tough. From the age of 96, you will have to survive on social security alone.
Bonds: Bonds are often the preferred option for retirees. These produce a reasonable rate of return and are about as safe as running out of a savings account. You can also earn interest-based returns, so if you invest enough in bonds, you can live off the yield without losing your principal. This gives you a higher tax rate than selling the asset for capital gains, but it also provides an important safety measure. If you can live off the bond yield, you can keep this account indefinitely.
At the current Treasury rate of 4.3%, a $1 million portfolio would generate approximately $43,000 annually. $3,500 per month. You’ll end up paying around $6,000 in Social Security, which is also enough to live comfortably in most places. You can make up for it by writing down the principal and calculating a stable withdrawal rate, or you should consider buying new assets as the bond matures, but if not, this is a long-term It becomes a source of income that is largely insulated from risk.
stock: The S&P 500 has historically returned about 10% annually. For someone with $1 million in assets, a simple index fund would theoretically waste about $100,000 in profits per year. In theory, this means you could generate $100,000 a year, or $8,300 a month before taxes, without losing any principal. With $2,500 in Social Security, this is a very generous amount. $10,800 per monthHowever, taxes can affect your earnings.
The problem is volatility. A rate of return of 10% is an average number. Some years the market performs much better, and other years it performs much worse. Some years there are active losses. You need the financial flexibility to take little or no withdrawals during down years. Otherwise, sequence risk will paralyze your portfolio. Very few retirees are able to do this, so stock picking is inappropriate for most people in retirement.
pension: “If a retiree wants the best guaranteed income possible,” says Mark R. Hayes, founder of CFP®. Recommendations regarding Undefined Wealth SmartAsset said: “She can simply push her savings into an insurance company in exchange for a SPIA, or lump-sum immediate annuity. This type of account is similar to a traditional annuity, where income is paid until the retiree dies. It works like this.” One of the main drawbacks, however, is that retirees lose control over their nest eggs. ”
Annuities can be incredibly lucrative and, like bonds, effectively eliminate longevity risk.as Brian M. Kuderna, CFP®author of What should I do with the money?Doing the math, if you buy a $1 million annuity at age 65, it will pay you $75,000 a year. $6,250 per month. Including Social Security payments, this comes to $8,750.
It is important to understand that these are hypotheses. It is rare (and not advisable) to keep all your money in her one asset, aside from pension options. The key is to simply explain what kind of monthly income $1 million can generate.
Calculate the expenses you need after retirement
The question is, what does “comfortable” look like? This is because the latter part is the expense side. How much money do you need for retirement? Creating this budget is very important because you need to know whether your savings can meet your needs and whether your lifestyle is compatible with your savings. is.
“As we prepare for retirement, we encourage our clients to be honest about their spending,” Kuderna continued. “Don’t shorten your spending plan. The cost of living doesn’t magically get cheaper after a certain age. It’s important to budget for fixed expenses and add other buffers. As I often tell my clients, once you retire, every day is Saturday, so your overhead costs may be higher than expected.”
This last part is especially dangerous.
Many people plan for retirement assuming that the cost of living will simply go down. They imagine a simpler life, a life with fewer financial needs. In a sense that’s true. For example, you’re less likely to incur childcare or college costs, and you no longer need to budget for monthly contributions to a retirement account (though you should replace that with a monthly savings budget).
However, don’t make unrealistic assumptions. You want to enjoy life instead of forever sticking to the strict budget you made when you were 47 years old. Among other costs, take an honest look.
A financial advisor can help you plan for retirement and achieve your financial goals. Play against your advisor today.
As with any good budgeting, you need to weigh your portfolio and income potential against your needs and wants, and build a comfortable buffer for the unexpected. You have $1 million in your IRA and $2,500 in Social Security benefits. That’s enough money to retire for some people, but be sure to plan for your needs and how it fits into your budget.
IRA investment tips
Building a $1 million IRA is quite an accomplishment. And the first step is to understand… What exactly is an IRA?
A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be difficult. SmartAsset Free Tools , we match you with up to three vetted financial advisors serving your area. You can also have a free introductory call with an advisor to decide which advisor you feel is a good fit for you. If you’re ready to find an advisor who can help you reach your financial goals, get started today.
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