A woman looks at her retirement savings to determine how long they might last.
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If you saved $2 million in an Individual Retirement Account (IRA) at age 67, would you be able to maintain it for the rest of your life? With some wise planning and investment, it is entirely possible to stretch a $2 million savings pot over several decades. A sensible approach might be to emphasize prudent budgeting, balancing investment risk and return, and securing additional sources of income if necessary. These steps can further increase your chances of not outliving your savings. Talk to a financial advisor today about securing your retirement.
To make a $2 million IRA balance last for up to three decades, you need to consider several factors, only some of which are under your control. To start with something you can control, first look at how to limit withdrawals from your IRA at a sustainable rate.
The often cited 4% rule provides a basis for a sustainable withdrawal rate. In your case, using it with a $2 million IRA would allow $80,000 in withdrawals in the first year of retirement, with adjustments for inflation in subsequent years.
An annual income of $80,000 is likely enough for most retirees to finance a comfortable, if not luxurious, lifestyle. Data from the Federal Reserve Bank of St. Louis shows that people between the ages of 65 and 74 spend an average of about $61,000 per year, while people 75 and older spend more than $53,000 per year. But if you need more than $80,000 to support your lifestyle, you can use a higher withdrawal rate or invest more aggressively to generate higher returns. Keep in mind that you can also count on Social Security benefits, assuming you’ve paid into the system throughout your career.
In terms of investment approach, the aim is to achieve solid returns while keeping risks under control. This will help you maintain your purchasing power over time. In general, a diversified 60/40 portfolio of stocks and bonds, using low-cost index funds, is a proven way to achieve growth that matches the market, without unnecessary volatility. However, it is just one of many paths you can take.
If you have other common sources of retirement income, such as Social Security, pensions or part-time work, tapping these first to pay expenses can limit withdrawals from your savings. Preserving the principal in your savings account provides a cushion against potential negative events, such as a market downturn, and increases the likelihood that this will last for the rest of your life.
A financial advisor can help you create a retirement income plan tailored to your needs, including calculating how much you can afford to withdraw from your savings.
A couple looks at their savings and calculates how much income their $2 million IRA could generate.
Under current market conditions, a balanced portfolio of stocks, bonds and cash could potentially generate $100,000 or more per year starting at age 67. For example, bonds currently yield about 5%. A portfolio consisting of $2 million in bonds could therefore generate $100,000 in income without touching the principal at all. Of course, bond yields may decline in the future, meaning you may need to withdraw some principal to maintain your desired income level.
Diversification by adding dividend stocks could further increase investment income, potentially eliminating the need to withdraw principal when bond yields fall. However, dividend stock prices can be more volatile than bonds, so this would carry some risk. More aggressive growth investing could increase your portfolio growth, even allowing you to withdraw more than 4%, but it would further increase risk by adding volatility. This is where a financial advisor may be able to help you.
Income annuities offer another item to consider. These offer an exceptionally low-risk way to secure monthly cash flow for as long as you live. However, costs are important considerations with annuities. Also keep in mind that the income from these insurance contracts is typically not indexed for inflation, so it will lose purchasing power over time.
Combining all these options, you can invest your IRA in a blended portfolio of bonds, dividend stocks, index funds, growth stocks and annuities. The exact mix of investments you will use will depend on your personal risk tolerance and income needs. But $2 million offers numerous alternatives that can support a comfortable lifestyle, depending on how long you live.
A new retiree enjoys a walk in the desert.
Despite the generally good position you’d be in if you saved $2 million at age 67, potential pitfalls still exist. Primary risks that are difficult to predict with any accuracy include longevity risk – the chance that you will live an extremely long time and run out of money – and the risk of poor market returns.
Maintaining cost control is also critical. If you start making withdrawals at rates higher than your portfolio’s return, you’ll deplete assets faster. Inflation, healthcare costs and taxes are also difficult to predict, but if they rise quickly, this will reduce your purchasing power.
Investment diversification, use of insured income sources, and a willingness to cut costs when necessary can help defend against the dangers. Overall, realistic planning around potential portfolio growth and sensible budgeting are critical to maintaining the lifelong viability of your retirement savings. A financial advisor can help you plan for and protect against these and other risks.
If you retire with $2 million, you may be in a good position to fund a fairly lofty lifestyle even decades into the future. Reasonable withdrawal rates, balanced investments, additional income streams and conscious budgeting can maintain and extend the viability of your retirement savings, even in the face of market fluctuations or extended lifespans.
Consider making an appointment with a financial advisor to analyze your retirement income needs. 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.
A quick and easy first step to assessing the adequacy of your retirement savings is to use SmartAsset’s retirement calculator. This free tool can help you estimate how much money you might have by the time you retire, and whether it will cover your estimated spending needs.
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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