Question: I have $5 million saved for retirement. Is this a sufficient nest egg to retire comfortably?
Answer: For most people, $5 million in savings is more than enough money to enjoy a comfortable life in retirement. The overwhelming majority of people retire with a lot less, and many of them are doing fine.
However, most retirees have different lifestyles and perspectives on what it means to be comfortable. Whether or not you can retire comfortably depends on how you plan to live in retirement and the associated cost of doing so.
Here’s what to know about retiring on $5 million.
[How to Retire at 55 on $1 Million]
Determine How You’ll Withdraw From Your Savings
Regardless of how much money you have saved, you’ll need to figure out your plan for withdrawing from your savings. This is relevant to the question at hand because it will inform the amount you feel comfortable withdrawing. Take the classic 4% rule for example. If you plan to follow this strategy, you’d be able to withdraw $200,000 per year from your $5 million balance.
Taking a required minimum distribution, or RMD, approach would entail dividing your balance by your remaining life expectancy and withdrawing that amount each year. You could also purchase an immediate annuity that pays a guaranteed amount each month for the remainder of your life.
There are many ways to do it, too many to go over here, but the point is that you’ll need to spend some time exploring the available approaches to determine what you’re comfortable with.
Consider Taxation
The type of account your savings are held in, and the way you invest that money will impact the tax liability you have.
If your money is held within tax-deferred IRAs, 401(k)s and other accounts, it will be subject to income tax upon withdrawal. If that money is inside Roth accounts, your withdrawals will be tax-free.
That taxation piece makes a big difference. And if that money is held within a taxable brokerage account, you have to consider the effect of taxation along the way, since capital gains, dividends and interest aren’t behind a tax shield.
[See: How to Reduce Your Tax Bill by Saving for Retirement.]
Evaluate Other Sources of Income
Most likely, you have at least one other source of income in retirement. If you are covered by Social Security, don’t forget to factor in your estimated benefit. Include pensions, rental income and part-time work as well.
Your Living Expenses
What amount of money do you need to cover your planned retirement living expenses? If you don’t know, spend some time going through your current budget to get an idea of how much it takes to support your lifestyle. In addition to the total amount, pay attention to what you spend your money on. Knowing how you spend your money is important because it provides you with a starting point for figuring out how to adjust your budget for retirement.
For example, maybe you commute to work. When that stops, expenses associated with that commute will stop too. If you’re currently saving in your company retirement plan, that will also stop when you retire, so that’s not money you’ll need to replace in your retirement budget.
On the other side, some expenses may go up in retirement. Will you spend more time on leisure travel? Factor that in. If you are too young to qualify for Medicare, how will you obtain health insurance and what will that cost? Get an estimate.
Do you own a home or rent? Will you pay your mortgage off before you retire or sometime soon? Do you plan on moving? Account for those changes as well.
[Read: How to Create a Retirement Budget.]
Is $5 Million Enough to Retire Comfortably?
Once you’ve determined a withdrawal plan you feel comfortable with, added your other sources of income such as Social Security and pensions, and accounted for taxes you’ll have a good idea of what your retirement income will be. If you’ve estimated your retirement expenses, you can compare them against that retirement income.
If you can comfortably cover your expenses based on what you estimate, $5 million is enough.
More from U.S. News
What Retirement Savers Need to Know About the SECURE 2.0 Act
Best College Towns for Retirement
Ask a Financial Pro: I’ve Saved $5 Million. Is That Still Enough Money to Fund a Comfortable Retirement? originally appeared on usnews.com
