Financial Planning

Is $2 Million Enough to Retire Comfortably?

Sam Stone
Sam Stone is the creator of the personal development blog Smarter and Harder. His mission is to start exciting new conversations that empower people to improve their work, lives, and money, and have fun doing it. In all things, he strives to lead with positivity, understanding, and more than a bit of enthusiasm.

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You may be able to retire with $2 million and live well, but before giving up a paycheck, it’s important to first consider your age and other factors to ensure your money lasts a lifetime.

Two million dollars, an amount of money that at one time could decisively separate the wealthy elite from the common folk, now has many people wondering if they even have enough to live out their best years in peace. In an age of ongoing market turmoil and widespread economic insecurity, is $2 million enough to retire?

If you’re approaching retirement age and wondering if you’ll be able to step down from your career gracefully, rest assured. With some research and insight, you will have everything you need to build a realistic retirement plan that fits you and your life.

While this article can help you decide if $2 million is enough to retire, consider hiring a nearby financial advisor or specialist financial advisor who can help build a personalized plan you can follow to achieve your desired lifestyle goals in your golden years.

Can you Retire with Less Than $2 Million? Or Do You Need to Save More?

The ideal retirement savings benchmark will differ for everyone, as many factors are involved. For example, the cost of living in your area, your lifestyle preferences, medical concerns, and additional retirement benefits all influence how much money you need to retire.

For many people, $2 million in retirement savings is plenty. Some can achieve a peaceful retirement with as little as $600,000. However, some people may need $5 million or more to live their preferred post-retirement lifestyle.

However, one thing is clear for practically everyone. Since many people now live for several decades post-retirement, we must think about retirement savings differently than we have in the past.

Rather than a single lump sum to fund a few twilight years, a modern nest egg should work more like a self-sustaining foundation.

Fortunately, one community has figured out exactly how we can achieve that.

Early Retirement and Self-Sustaining Savings

In 1992, Vicki Robin and Joe Dominguez published Your Money or Your Life, a book that would go on to change many people’s entire outlook on life and work. In it, they demonstrated how a person could build up enough savings to retire at any age and live off their money indefinitely.

Today, many people point to Your Money or Your Life as one of the founding documents of the FIRE (financial independence / retire early) movement. The movement has exploded into mainstream popularity in recent years and spawned countless blogs about FIRE, podcasts, online personalities, and followers.

The core concept is that your retirement investments will typically grow over time through interest, dividends, capital appreciation, etc. Therefore, if you consistently spend less money than your assets make, then you should never run out of money.

Many people plan for early retirement using something known as the 4% rule. However, it’s important to note that “rule” is a misnomer; the 4% rule is more of a general principle:

The 4% Rule – If you have enough money invested that you can cover a year’s expenses with only 4% of the total, then the money will typically outpace inflation and replenish faster than you deplete it.

For example, with $2 million in savings, you should be able to safely pay yourself an annual retirement “salary” of $80,000, which is 4% of $2 million. At that rate, your money should generally continue growing faster than you spend it.

Planning for FIRE Vs. Traditional Retirement

FIRE is not for everyone. Amassing significant retirement savings early in life takes serious commitment, focus, and a willingness to break with cultural norms. However, the math that drives the FIRE movement can be helpful in planning for retirement.

In particular, the 4% rule is a helpful tool for retirement forecasting at any age. If you want to know how much money you need to retire, it will help to think of it as a multiple of how much you expect to spend.

If you have relatively low annual expenses or expect you will post-retirement, you can likely get there with a fairly small nest egg. However, if you plan to withdraw $250,000 per year in retirement, $2 million can run out pretty quickly.

Another critical difference between FIRE and traditional retirement is that there is much more infrastructure in place for conventional retirees.

People retiring early must be completely self-sufficient with their savings and investments alone. Those saving for retirement at age 60 and beyond have additional options like social security, pensions, tax-deferred retirement accounts, senior medical benefits, and more.

4 Steps to Decide if Your Retirement Number Is $2 Million or Something Different

There are two factors that make retirement planning particularly tricky. First is the number of details specific to your unique situation, such as your expenses, where you live, and how you want to live. 

Second, is the suite of variables outside your control, such as investment performance, some retirement benefits, and unexpected medical expenses.

Fortunately, there is a lot we can do to iron out the details of the former. And doing that can help smooth out any bumps in the road from the latter. The end result – You’ll know whether a $2 million nest egg is your goal or if your target savings milestone is smaller or larger.

1. Figure out Your Estimated Annual Spending

The first step to figuring out how much money you need to retire is estimating how much you expect to spend during retirement. Higher expenses will naturally require a bigger target.

To gather a rough estimate of your annual expenses in retirement, start with a snapshot of your yearly spending now. If you regularly budget, this number should be pretty easy to find. If not, it may require a bit of investigating.

Once you have that number, you can adjust it based on how you expect your expenses to change in retirement. Consider some of the following questions:

  • Will you live where you do now? If you move, will the cost of living in the new area differ?
  • If you currently rent or pay a mortgage, do you expect that expense to change by the time you retire?
  • Do you have additional debt expenses now that you will pay off by retirement?
  • What lifestyle changes do you expect to make in retirement, and how will the costs change?
  • Do you expect your medical expenses to increase as you age?
  • Are there other expenses you expect retirement to add, remove, or change?

Try to take your current annual spending, adjust as realistically as possible, and the result will be your estimated yearly retirement spending. Remember that there are many variables here; finding an exact answer is impossible. Your best estimate is all you need at this stage.

2. Adjust for Other Income Sources

Now that you have an idea of what your expenses will look like after retiring, we can start to figure out how you will cover those expenses.

Before we can figure out how much you need in savings, we need to know how much you can cover with your other sources of income. First, determine if you expect to have income in retirement from any of the following sources:

  • Pension(s)
  • Social security benefits
  • Part-time work after retiring
  • Income from other members of your household
  • Passive or residual income, such as rent payments or royalties

For this step, you can ignore your private retirement accounts, such as IRAs and 401(k)s. We will discuss those in step 3.

The goal is to estimate your annual post-retirement income from all of these combined sources. Then, you can subtract that number from the annual expenses you estimated in step 1. This new number will be the remaining costs your savings will need to cover. 

For example, if you expect to have $100,000 in annual costs and make $30,000 per year from your pension and social security, you would have $70,000 in remaining expenses to pay each year. 

3. Apply the 4% Rule to Your Savings

You have now figured out your annual retirement expenses and how much of that bill you can cover with your regular retirement income. The next step is to figure out how much money you need to save to cover the remaining expenses.

The quickest way to do that is with the 4% rule. Here’s how: take your remaining annual expenses and multiply that number by 25. The result is how much money you would need such that 4% of it would cover those expenses.

In the example above, with $100,000 in expenses and $30,000 in income, you would need your savings to safely provide $70,000 annually to cover the rest. If you multiply $70,000 by 25, you would have a retirement number of $1.75 million. With that amount, you should generally be able to indefinitely pull out 4% ($70,000) per year.

Note that this goal assumes most of the money is in investment accounts such as a Roth IRA, 401(k), or taxable brokerage account invested in low-cost, broad mutual funds. Assets like your home, vehicles and other property shouldn’t play a significant role. While these things factor into your net worth, their values should not affect your retirement calculations unless you plan to sell them.

4. Tweak and Tune to Your Preferences

To sum up, you want to estimate your expenses, subtract your income, and use the difference to calculate your retirement number. If the result differs from your expectations, now is the time to adjust the variables within your control.

If the number is higher than you feel you can realistically reach, you can try dialing down your lifestyle goals for when you retire. Alternatively, you can turn up the heat on your efforts to build up your savings pre-retirement.

You may consider the 4% rule too conservative or not conservative enough. You can use a different safe withdrawal rate to calculate your final number if that’s the case.

Use the calculation from steps 1-3 as your starting point. From there, adjust different factors as you need to until you find a retirement number that feels secure and achievable and gets you excited for the many great years ahead. 

You, Your Golden Years, and $2 Million

Retirement plans and goals can be messy. A $2 million nest egg may be plenty for some. Others might find it paltry or excessive. The only way to know if it is the best number for you is to take a closer look at your life and finances.

As always, personal finance is more personal than finance. While there are standard numbers we can use and calculations we can crunch, the answer will always come down to you. With proper planning and a bit of elbow grease, you should be more than able to build a stable, flourishing foundation as you enter your golden years.

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