Let’s say you want to retire early, at age 55. Is $5 million enough to achieve your goal? While the cost of living varies from place to place, a nest egg this size would likely give more than enough money for decades of comfortable living. Even if you live another 50 years, $5 million in savings would allow you to live on $100,000 per year. Here are four things to keep in mind as you plan 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 all-important question is “how much?” How much money will you need per year to live comfortably? How much can you plan on 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, one rule of thumb is that you should shoot to have eight times your annual income in savings by the time you retire. So if you make the national median income of $70,700 per year, you should plan to have around $570,000 in retirement savings before you stop working.
Now, the eight-times rule of thumb is based on a retirement age of 65. Either way, though, this would make $5 million a very comfortable retirement nest egg for most households. Even if you retire at 55 and you generate no returns on your money going forward, you could still withdraw $100,000 per year for decades.
Try To Generate Income
Income investing can be an effective strategy in retirement because it allows you to withdraw the interest that an investment portfolio generates without ever touching your core principal. On the other hand, it can take a lot of money to generate meaningful income. Fortunately, $5 million is indeed a lot of money.
In early 2023, a five-year Treasury note paid an annual 3.5% coupon rate. Even if you poured all of your money into these safe and conservative assets, you would still generate $175,000 per year in active income. That’s enough for most people to live on without having to even consider a burn rate on their retirement fund.
With a significant retirement account, look at investing in income assets like bonds and dividend stocks. This is a way to potentially stretch your retirement savings as far as possible.
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Plan For Healthcare Costs
Social Security will be a nice bonus to your retirement savings, although the odds are with $5 million in the bank you will not depend on it. Medicare, on the other hand, can play a meaningful role in your retirement plan.
As you age, healthcare costs will be an increasingly important part of your budget. After you turn 65, you become eligible for Medicare, which will pick up a lot of these costs. Until then, make sure you 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 a lot on your expenses. For example, someone who has paid off the mortgage on their house will probably need less in 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 any dependents to care for? Do you have fixed costs or major investments and properties? If you do own a home, will you have enough money to make major repairs if and when they arise?
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 on retiring early almost anywhere. While you should be more careful with your money in extremely high-cost areas, this size nest egg can generate more than $100,000 per year of income. That should be more than enough to live comfortably on starting at age 55.
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 need to save each month to get there.
Consider working with a financial advisor to develop a comprehensive financial plan that addresses your income needs in retirement, estate plan and more. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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