Let’s say you want to retire early, at age 55. Is $5 million enough to reach your goal? While the cost of living varies from place to place, a nest egg of this size would likely provide more than enough money for decades of comfortable living. Even if you lived another 50 years, $5 million in savings would allow you to live on $100,000 a year. Here are four things to keep in mind when planning 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 most important question is “how much?” How much money will you need each year to live comfortably? How much can you plan for 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, a rule of thumb is that you should aim to have eight times your annual income in savings by the time you retire. So, if you earn a national median income of $70,700 a year, you should plan to have about $570,000 in retirement savings before you stop working.
Now, the eight-fold rule of thumb is based on a retirement age of 65. Either way, though, that would make $5 million a very comfortable retirement nest egg for most families. Even if you retire at 55 and generate no return on your money in the future, you could still withdraw $100,000 a year for decades.
Try to generate income
Income investing can be an effective strategy in retirement because it allows you to withdraw the interest generated by an investment portfolio without ever touching your principal principal. On the other hand, it can take a lot of money to generate significant income. Luckily, $5 million is a lot of money.
As of early 2023, a five-year Treasury bond paid an annual coupon rate of 3.5%. Even if you invested all your money in these safe, conservative assets, you would still generate $175,000 a year in active income. This is enough for most people to continue living without even having to consider the rate of consumption of their retirement fund.
With a significant retirement account, consider investing in income assets such as bonds and dividend stocks. This is one way to potentially stretch your retirement savings as far as possible.
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Health care cost plan
Social Security will be a nice bonus to your retirement savings, although chances are with $5 million in the bank you won’t be dependent on it. Medicare, on the other hand, can play a significant role in your retirement plan.
As you age, healthcare costs will become an increasingly important part of your budget. Once you turn 65, you become eligible for Medicare, which will cover much of these costs. Until then, make sure you have a 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 greatly on your expenses. For example, someone who has paid off their home mortgage will likely need less 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 dependents to take care of? Do you have fixed costs or important investments and properties? If you own a home, will you have enough money to make major repairs if and when they become necessary?
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 to retire early almost anywhere. While you should be more careful with your money in extremely expensive areas, this size nest egg can generate more than $100,000 a year in income. This should be more than enough to live comfortably from age 55 onwards.
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’ll need to save each month to get there.
Consider working with a financial advisor to develop a comprehensive financial plan that meets your needs for retirement income, estate planning and more. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can interview your advisors at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you reach your financial goals, start now.
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