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With $2.5 million in cash, $500,000 in IRA and average Social Security benefits, someone at 67 is probably in a pretty good place to retire. However, retiring comfortably involves more than just financial resources. It also requires a balance between income and expenditure. With that in mind, you may need to reduce lifestyle costs or invest to generate more income if you want to retire right away.
Do you have questions about saving and planning for your retirement? Talk to a financial advisor today.
Retirement planning involves estimating expenses and calculating likely income. You can then determine whether you have sufficient assets to cover the costs. If the numbers don’t quite add up, there are several strategies to make ends meet by increasing revenues, reducing costs, or both.
The top costs for many retirees include housing, healthcare, food and travel. Reducing costs in retirement may mean deciding to downsize or move to a cheaper location. Possible sources of income include Social Security benefits, retirement account withdrawals, investment earnings, retirement benefits, and annuity payments.
Someone who has $2.5 million in cash and $500,000 in an IRA at age 67 could be in a good place to retire and live safely, provided he plans accordingly. Assuming they receive the average monthly Social Security benefit of $1,793 per month in September 2023, earn a modest 2% annual return on their cash reserve by investing in government bonds and, finally, withdraw using the 4% rule of their IRA, this is what their annual income might look like:
That amounts to $91,516 in annual income. With a paid-off house and no mortgage, average health care costs, and a modest cost of living of, say, $50,000 per year, this person could reasonably retire. In fact, they may not need to withdraw much of their cash principal if they can set up a plan to have Social Security, IRA withdrawals and interest income cover their annual expenses.
Bryan M. Kuderna, CFP®, founder of the Kuderna Financial Team, highlights a strategy for people with large cash reserves that helps make the most of Roth retirement accounts.
“With a lot of money, I would suggest converting some or all of their IRA to a Roth over time while they are in a low tax bracket with only Social Security income,” Kuderna told SmartAsset. “The income tax due on the conversion must be paid with cash, not IRA assets.”
Significant cash reserves can also protect against stock market volatility, but can also expose it to the effects of inflation. So what if you still want to invest, but are looking for a way to do so that takes tax efficiency into account?
Nathaniel M. Donohue, CFP®, partner at Consilio Wealth Advisors, recommends that households with significant taxable assets consider direct indexing as a tax strategy.
“Rather than purchasing one index fund or ETF to invest in an index, direct indexing allows investors to purchase 300 to 500 individual stocks that reflect the risk-reward profile of the index,” Donohue explains. “This provides hundreds of ticker symbols to extract losses from, rather than from one index fund or ETF. In a year when the entire index is positive, there may be several, if not dozens, of individual stocks that are experiencing losses. Investors can benefit from this through direct indexing [tax] loss harvest that index fund/ETF investors simply ignore.”
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To make your retirement savings last longer, there are a number of strategies you can implement. Here are a few examples:
Downsize to a smaller, cheaper home: This reduces housing costs, including utilities, taxes and maintenance.
Move to an area with a lower cost of living: Housing represents the largest item in most household budgets. It also varies the most by location, so you can lower this by moving to a cheaper city or state.
Take advantage of senior discounts: There are tons of these deals available if you look for them. You can find them on things like travel, groceries, dining, entertainment and more.
With $2.5 million in cash and $500,000 in an IRA, this 67-year-old looks like he’s in a good place to retire. However, predictions like these come with a number of assumptions, some of which may not turn out as expected, nor may they match your personal expectations.
Consider working with a financial advisor when making such plans for your retirement. You may also want to build in cushions for healthcare, housing, taxes, longevity, and market risks to help you feel even more secure in your retirement plans.
If you need help planning your retirement years, a financial advisor may be able to help. Finding a financial advisor does not have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can have a free introductory meeting with your advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
SmartAsset’s Social Security Calculator helps answer the question of how much you can expect in Social Security benefits.
Have an emergency fund on hand in case you encounter unexpected expenses. An emergency fund should be liquid – in an account that is not at risk of significant fluctuations like the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But with a high-interest account, you can earn compound interest. Compare savings accounts from these banks.
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The post I am 67 years old, have $2.5 million in cash, $500,000 in an IRA and Social Security. Should I retire now? first appeared on SmartReads by SmartAsset.
