If you’re planning to retire at 50, you may be wondering how much is needed to sustain your household over the coming decades. For Americans between the ages of 45 and 54, the average savings is $254,700, according to data from the Federal Reserve Survey of Consumer Finances. Individuals who have accumulated $2 million will have significantly more than that total. However, there are other factors to think about before stepping away from the office.
[Related:What Is the Average Retirement Savings Balance by Age?]
Use the following guidelines as you think about retiring at 50 with $2 million:
— Estimate your expenses.
— Forecast with the 4% rule.
— Look at Social Security.
— Think about allocations.
— Plan for health care costs.
Estimate Your Expenses
As you think through whether $2 million is enough to retire on at 50, it can be helpful to calculate your annual cost of living.
“When determining how much someone needs for retirement, you typically would start with their yearly expenses and take out any income, such as a pension,” says Joe Wilson, a financial advisor and partner at Ten Point Financial LLC in Grand Ledge, Michigan. “You would then multiply this number by 25 to get to a starting point for how much someone should have saved in investments.”
That calculation will show the amount you could expect to need at an average retirement age, such as 65 years old. “Retiring at 50 means this multiplier will likely be closer to 28 or 30,” Wilson says.
If your annual expenses are $50,000 and you want to retire at 50, you could anticipate needing approximately $1.5 million in investments (50,000 x 0.30). This could be used as a starting point, as other income sources from a pension or Social Security benefits could impact the final figure. It will also depend on the age when you retire and if your spouse continues to draw a salary after you retire.
[Related:How to Retire on $500K]
Forecast With the 4% Rule
The 4% rule is often used as a guideline to help you cover living expenses and avoid running out of money in retirement. If you have $2 million and withdraw 4% every year, you would have $80,000 annually to support your lifestyle. You can compare this figure to your estimated expenses to see if you’ll have enough.
You’ll also want to recognize that inflation will affect your purchasing power. In recent years, inflation has been near two digits, hitting a peak of 9.1% in June 2022, which was the highest rate since the early 1980s. However, a year later, in June 2023, inflation dropped to 3%. Historic data reveals that the average rate of inflation has been 3.8% per year between 1960 and 2023.
Given this, prepare to withdraw higher amounts as the years pass. “Keep in mind that the amount you need to spend to maintain the same quality of living will rise with inflation, which will most likely outpace your interest if you keep your money in a conventional term deposit,” says Samantha Hawrylack, co-founder of How to FIRE in Coatesville, Pennsylvania.
Look at Social Security
You can create a my Social Security account to estimate your benefits. If you’ve earned enough work credits and paid taxes, you’ll be eligible to receive paychecks starting at age 62. However, if you wait until your full retirement age, your monthly benefit will be higher. The amount increases every year until age 70.
If you retire at age 50, you may have a stretch before you start receiving Social Security benefits. You’ll also want to check your work record, as your employment history and wages earned are used when calculating the benefit you’ll receive. The Social Security Administration takes the highest 35 years of wages for the equation.
Think About Allocations
Your investment approach will also influence your nest egg’s value and duration. “Properly allocating assets, especially to stocks, is vital in generating sufficient returns to sustain growth even as funds are withdrawn from the account,” says Philip Gibson, vice president and financial advisor at Wealth Enhancement Group in Rock Hill, South Carolina.
Certain types of retirement accounts include guidelines for withdrawing funds. You might have some of your savings in a 401(k) or IRA. “If it is in retirement accounts, you may not be able to touch them before you are 59 ½ years old without penalty,” Wilson says. Withdrawing funds before then could result in a 10% penalty and the funds will be subject to taxes as well.
When you retire at 50, you’ll likely need to bridge the gap until you reach a point when you can withdraw funds without paying additional fees. You might look for other types of investments that don’t have age requirements for withdrawals, such as annuities, which may offer a guaranteed source of income for a set period.
[READ: 7 Best Funds for Retirement.]
Plan for Health Care Costs
Depending on your situation, you may have to pay for health insurance and related expenses for a time. If a family member continues to work, you might be able to get health coverage through their plan. For Medicare, you’ll need to wait until you are 65 years old to be eligible. If you’ll be paying for health insurance out of pocket until then, factor that into your annual expenses. And when Medicare starts, individuals who have income above a certain threshold could face additional fees.
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Can I Retire at 50 With $2 Million? originally appeared on usnews.com
