If you set aside millions for retirement, you’ll be far above average in terms of wealth compared to many Americans. The average 401(k) balance in the second quarter of 2023 was $112,400, according to Fidelity Investments. That said, savings rates are going up: The average balance has increased 8% from five years ago and nearly 40% from 10 years ago.
The number of retirement millionaires is rising, too. According to Fidelity, there were 378,000 millionaires holding a 401(k) account in the second quarter of 2023, compared with 340,000 in the year’s first quarter, representing a 10% increase. Among those with individual retirement accounts, the number of millionaires in the first quarter of 2023 was 307,623, and in the second quarter, it was 349,104, indicating a 13% increase.
If you have a goal of retiring at 65 with $5 million or have reached the age of 65 and have $5 million saved, you may be wondering what retirement will look like. What you do during the years after you stop working will depend on variables such as your health and interests. Still, it can be helpful to run calculations to know what to expect in terms of budgeting and expenditures.
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How to Spend With $5 Million at 65
One income-planning approach is to “simply live off the earnings a nest egg will generate from an interest- or dividend-bearing account,” says John Jones, an investment advisor representative at Heritage Financial in Newberry, Florida.
If you have $5 million invested in an account that yields 4%, it could generate $200,000 per year in income (5,000,000 x 0.04). However, inflation will impact your spending capacity. “If we apply a 2.5% inflation rate to the previous example, this yield is closer to $73,000 per year,” Jones says.
You could also take distributions from retirement accounts and live off the withdrawals. When taking funds out for retirement, a common guideline to follow is the 4% rule. “The strategy suggests withdrawing 4% of your savings in each year of retirement, and after adjusting for inflation, the funds will last over a 30-year time horizon,” says Will Gogolak, assistant teaching professor of finance at Carnegie Mellon University’s Heinz College. With a $5 million nest egg, this withdrawal strategy would create $200,000 in income each year.
Your lifestyle will play a role in determining if you need that much, or more or less, each year. “Living off $200,000 becomes even more viable if you own your home outright or live in a cost-effective city,” Gogolak says. However, if you take out more than $200,000 for large expenditures like a vacation home or world travel, you could deplete your savings at a faster rate. Your medical needs could have an impact, too. “A noteworthy concern arises from the tendency for individuals to underestimate the potential health care expenses that may emerge during their later years,” Gogolak says.
A safe strategy may include living below the $200,000 annual spending threshold. Keep in mind that once you reach age 62, you’ll be eligible for Social Security benefits, although taking benefits at that time would mean a reduced amount. You could opt to wait until your full retirement age to apply and receive the full benefit. This will bring in an additional income stream each month. The average Social Security benefit in August 2023 was $1,705.79. If you were a high earner during your working years, you could receive more every month.
Plan for a Long Retirement at Age 65 With $5 Million
While $5 million may seem like a solid start, keep in mind that your retirement could last for decades. “If you retire at 65, you may have 30 or more years you need to provide income,” says Brad Bestgen, a financial planner and managing partner at Bestgen Wealth Management in Braintree, Massachusetts.
To maintain your funds, one approach is to allocate your investments among different risk categories. “For us, when someone retires at 65 we like to have 60% to 70% of the portfolio invested for income,” Bestgen says. These could include bonds, dividend-paying stocks and real estate investment trusts, known as REITs. The remaining 30% to 40% could be “invested for growth and long-term appreciation to help combat inflation and longevity,” Bestgen says.
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Get Ready for Extra Expenses When Retiring at Age 65 With $5 Million
Once you get into the realm of $5 million for a nest egg, you could face additional financial costs. You might be in a higher tax bracket, meaning a greater percentage of your income could be subject to federal and state taxes. It’s also possible that some of your fund transfers or sales of assets will be subject to taxes. If you want to avoid state taxes, you could reside in a state that doesn’t charge income tax. These are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
For medical costs, you might have to account for the Medicare income-related monthly adjustment amount, or IRMAA. This is an amount you could pay in addition to your Part B or Part D due to your higher income level. As of 2023, if your annual income is between $194,001 and $246,000 as a couple or between $97,001 and $123,000 as an individual, your monthly Part B premium would be $230.80, compared to $164.90 for couples with an income of $194,000 or less or individuals with an income of $97,000 or less. For Part D, if your annual income in 2023 is between $194,001 and $246,000 as a couple or between $97,001 and $123,000 as an individual, you’ll owe an additional $12.20 above your plan premium.
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Can I Retire at 65 With $5 Million? originally appeared on usnews.com
