Yahoo Finance Retirement Planning: What Your Monthly Spending Might Look Like If You Have $2 Million Saved?
In the past, the general rule was that having even $1 million set aside for retirement would be enough to live comfortably. So, it stands to reason that $2 million should be plenty.
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But the cost of living is rising and people are living longer, so retirees are spending more than ever before. Not only that, but retirement comes with many costs, such as healthcare, lifestyle maintenance and taxes. Because of this, even $2 million might not go as far as you’d think.
On the other hand, if you invest it wisely and make some money through passive income, $2 million could serve you well during retirement. If you’re trying to get a clearer picture of what your monthly or yearly spending might look like if you have $2 million set aside, here are some examples based on different factors. Keep in mind that everyone’s situation is different, though, and that these are only estimates.
Follow the 4% Rule for $6,666 a Month
“If a retiree has $2 million saved up, the amount they would have during their retirement years would depend on several factors such as their withdrawal rate, investment returns, and the length of their retirement,” said James Allen, CPA, CFP, CFEI, and founder of Billpin.
“A common rule of thumb is the 4% rule, which suggests withdrawing 4% of your retirement savings in the first year and adjusting that amount for inflation each subsequent year,” Allen said. “So, if a retiree has $2 million, they could withdraw $80,000 in the first year.
Patrick O’Leary, senior vice president and financial advisor at D. A. Davidson & Co., added, “There is a wide range of outcomes possible from a $2 million portfolio. Many advisors quote the 4% rule, which is that — historically speaking — you could withdraw 4% of a portfolio (or $80,000/year), and adjust that withdrawal upward for inflation each year. It’s important to know that this has held true for a broadly diversified portfolio with a 60/40 allocation.”
That $80,000 a year breaks down to roughly $6,666 a month, meaning you’d have that amount to spend.
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10% Return on Investment Could Equal $17,000 a Month
The 4% rule doesn’t work for everyone. After all, $6,666 might not be enough to cover all of your expenses during retirement. It’s also not a guarantee since the actual amount you have can depend on things like your investment mix and inflation.
“The biggest mistakes we see are retirees either being too aggressive in their investment mix, or too conservative,” O’Leary said. “Both can end up being serious mistakes. Inflation, taxes, and high cost investments (including hidden costs) can all contribute to running out of money.”
If you’re looking for a higher number, you may want to consider reinvesting. Depending on the returns, you could end up with much more money available each month.
“The amount of money that a retiree would have if they had $2 million dollars during the retirement years would come down to how much they spend and how much of the compound interest they choose to reinvest,” said Sebastian Jania, owner of Manitoba Property Buyers. “If a retiree is able to generate a 10% return on that 2 million dollars a year, then they would have $200,000 a year, or approximately $17,000 a month which they could spend as it would be pure interest.”
So, say you generate a 10% return on investment and have $17,000 to work with. You could spend it, or you could reinvest a portion of that money to increase your money even more.
“Further, if they decided to only spend a portion of that and reinvest the remainder, then theoretically they would be able to live indefinitely off of the retirement savings,” Jania said. “This estimate, of course, does not factor in things such as inflation or years where returns happen to be less than 10%, but it does give context to the matter.”
Cost of Living Can Affect Your Monthly Spending Amount
A big factor to consider when planning your retirement — and ensuring you can live comfortably — is cost of living. “Living comfortably on $2 million in retirement depends on a variety of factors,” Allen said. “One of the most significant is the cost of living in your area. Living in a city with a high cost of living will eat into your savings much faster than living in a more affordable area.”
Consider where you plan to live, as well as how much you intend to spend on essentials and nonessentials. This can help you create a retirement budget that works for you in the long term.
Lifestyle Changes Can Help or Hurt Your Budget
Another aspect to consider is lifestyle and how it might change once you retire. “If you plan to travel extensively or have expensive hobbies, you may need more than $2 million to maintain your desired lifestyle throughout retirement,” Allen said.
When making your retirement plan, consider what types of changes you might be making. Do you plan to travel a lot, pick up a new hobby or start hosting parties or events? Do you plan to downsize and move to a cheaper location? All of these things can impact your monthly spending and quality of life during retirement.
Healthcare Costs Tend To Go Up
The topics of longevity and health can be stressful, but it’s important to consider them as things like long-term care and healthcare can contribute to your spending. “The longer you live, the more money you’ll need in retirement,” Allen said.
The exact amount of money needed to pay for healthcare or long-term care varies from person to person. However, The New York Times found that someone retiring at 65 years old with a 20-year retirement plan spends an average of $157,500.
Taxes Can Cut Into Your Retirement Savings
Even after retiring, you’ll still have to consider certain taxes. For example, if you’re a homeowner, you’ll be responsible for property taxes. This can increase your monthly spending amount. Certain investment accounts are also taxable, so consider this before you start withdrawing from them.
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