For years, financial experts suggested a retirement savings target of $1 million. But when you judge things like inflation, rising health care costs and longer life expectancies, that amount of money may not go as far as you think. Aiming for $2 million in retirement savings may be more realistic or even necessary to enjoy the lifestyle you want. But is it possible to retire on $2 million, and if so, how much should you save and invest annually? And can you retire with $2 million if you start saving late or don’t make that much money? Here’s an overview of what careful planning and work required to reach $2 million.
Consider working with a financial advisor as you chart a course toward a $2 million retirement nest egg, or any amount, for that matter.
Why retire with $2 million?
Saving $1 million for retirement may seem like more than enough money, especially if you’re considering a more frugal lifestyle. For example, if you plan to downsize your home, cut frivolous expenses, and maintain good health to limit medical expenses, then you might assume that you can easily make $1 million.
However, it’s important to consider how far $1 million can really go in retirement. Even if you supplement your savings with Social security benefitspension or annuity, there are some things you may not have control over that can derail your retirement plans.
The development of a serious illness, for example, may result in a stay in a long-term care facility. If you don’t have a long-term care insurance policy, the cost of living in a nursing home can dramatically erode your retirement savings.
Then there are other things like inflation and market volatility to account for. When the prices of consumer goods and services go up, your purchasing power goes down. That means your money doesn’t go as far. If inflation is combined with market volatility that affects the value of some of your investments, it can lead to losses, meaning less money to live on.
And of course, you have to consider longevity. As living to 90, 95 or even 100 becomes the norm that can put a strain on $1 million. Without proper planning and budgeting, it’s possible to run out of money sooner rather than later. All of these things can make saving $2 million for retirement a more attractive goal.
How to retire on $2 million
If you want to retire with $2 million or more to your name, there are certain things you need to do to make that happen. Otherwise, you may not achieve your goal. Here are some of the most important things to keep in mind as you plan your retirement savings strategy.
Assess your retirement budget
The first step in saving $2 million for retirement is determining if that’s a good number to aim for based on what you plan to spend later. Creating a hypothetical retirement budget can help estimate what you will spend each year and what your target retirement withdrawal rate should be.
Your retirement budget should include normal living expenses, including:
But you may also need to include medical and health expenses, as well as any money you plan to spend to maintain a certain lifestyle. For example, this could include travel expenses or money you spend on hobbies.
Also consider where debt fits into yours budget for retirement. If you want to retire with $2 million and no debt, then you’ll need to understand that you can save and pay down debt aggressively during your working years.
Consider your timeline
Once you have a retirement budget in mind, the next step is to break down your $2 million savings goal. It’s as simple as figuring out how long you need to save based on your current age and when you hope to retire. For example, if you are now 25 and want to retire at 65, you will have 40 years to save and invest. You’ll need to grow your portfolio by an average of $50,000 per year. This includes the money you deposit directly and the earnings from you investment portfolio.
If you’re starting late, like age 35, you’ll need to decide whether retiring at age 65 with $2 million is a realistic goal. Having 30 years to save means you’ll need to grow your portfolio by an average of $66,666 per year. If you don’t think you can do that at your current savings rate and rate of return, then you may have to wait until age 70 or 75 to retire to reach the $2 million mark.
Use tax-advantaged plans
Tax-advantaged plans are the first place you can start saving for retirement. If you have 401(k) plan at work and want to save $2 million for retirement, increasing your contributions each year can help you get there. If your plan includes an employer matching contribution, that’s free money you can add to your retirement savings pool.
After 401(k) or similar plans you might consider individual retirement account the next one. Whether it makes sense to choose a traditional IRA or a Roth IRA may depend on your current tax situation and where you expect to be taxed in retirement.
If you are now in a higher tax bracket, you may find the deduction allowed for traditional IRA contributions valuable. Of course, this depends on whether you expect to be in a lower tax bracket when you retire, at which time you’ll have to pay taxes on withdrawals from your IRA.
On the other hand, you can choose Roth IRA if you expect to be in a higher tax bracket when you retire. And with $2 million or potentially more saved, you could be, based on how much you withdraw each year. In this case, you may benefit more from being able to take tax-free withdrawals from a Roth IRA.
Invest in stocks with an online brokerage account
Contributing to a workplace retirement plan or IRA is a starting point, but you may need to expand your investment options to reach your $2 million retirement goal. Opening an online brokerage account allows you to continue building your portfolio beyond annual contribution limits for tax-advantaged plans.
You can use a brokerage account to invest in stocks, mutual funds, and exchange-traded funds. Some brokerages also offer bonds, futures, options and even cryptocurrency trading if you’re looking for more ways to diversify.
Investing in stocks is especially important if you’re trying to retire with $2 million because they offer the best growth potential compared to other investments. Stocks are riskier, but the longer your investment time horizon, the more time your portfolio has to recover from periods of volatility.
When choosing an online brokerage, do not forget to pay attention to the choice of investments, as well as the fees you will pay for trading. Ideally, the brokerage you choose offers commission-free stock and ETF trades, which can allow you to keep more of the returns you earn from these investments.
Increase your savings rate year after year
Saving 10% to 15% of your income is a generally accepted rule of thumb for retirement planning. But saving that amount may not be enough if you’re trying to reach $2 million in assets by the time you retire. Instead, you may need to save 20%, 30% or even more of your income to reach your goal. If you can’t afford to invest that much of your income now, you can increase your savings rate every year. For example, if you’re saving in a 401(k) and you get a 2% raise each year, you can put that extra 2% into your retirement account. Or, as you pay down debt, you can redirect the money you used to make those payments to your own online brokerage account.
The bottom row
Retiring with $2 million can increase your financial security tomorrow if you’re willing to put in the effort to save and invest today. Whether it’s possible to retire with $1 million, $2 million, or more may depend on the details of your financial situation.
Retirement Planning Tips
Consider talking to your financial advisor about strategies you can use to save $2 million for retirement. If you don’t already have a financial advisor, SmartAsset’s financial advisor matching tool can help you find one. You just need to answer a few short questions to get personalized advisor recommendations for your area. if you are ready start now.
One major key to achieving your retirement financial goals is making sure you have the right mix of asset types. This is where free asset allocation calculator may come in handy.
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