Eric Reed
·5 min read
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 haveeight times your annual income in savings by the time you retire. So if you make the nationalmedian 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 investingcan be an effective strategy in retirement because it allows you to withdraw the interest that an investment portfolio generateswithout 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.
If you’re ready to be matched with local advisors that can help you achieve your financial goals, get started now.
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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As an enthusiast deeply immersed in the realm of personal finance, retirement planning, and investment strategies, it's evident that the article in question discusses a critical and widely debated topic: early retirement with a $5 million nest egg. My proficiency in this field allows me to dissect and elaborate on the concepts presented in the article.
The article, dated October 30, 2023, primarily addresses the question of whether $5 million is sufficient for early retirement at the age of 55. It delves into various aspects of retirement planning, offering insights and advice. Now, let's break down the key concepts discussed:
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Retirement Planning Basics:
- The article emphasizes the importance of determining how much money is needed for a comfortable retirement. A rule of thumb mentioned is having eight times your annual income in savings by retirement age, based on a median income of $70,700 per year.
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Income Generation in Retirement:
- Income investing is highlighted as an effective strategy for retirees. It involves generating income from investment portfolios without depleting the core principal. The article suggests that $5 million is a substantial amount, and it explores the potential of income generation through investments such as bonds and dividend stocks.
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Healthcare Costs:
- The article brings attention to healthcare costs in retirement, indicating that Medicare can play a significant role in a retirement plan after the age of 65. It advises budgeting for health insurance and related expenses, considering the increasing importance of healthcare costs as one ages.
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Dependents and Fixed Costs:
- The article acknowledges that retirement income needs depend on individual expenses. It prompts readers to consider factors such as dependents, fixed costs, property ownership, and potential major expenses like home repairs. It emphasizes the need to account for these factors in retirement planning.
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Estate Planning:
- A brief mention is made about estate planning, suggesting that if one intends to leave money to family or heirs, additional considerations and financial resources may be necessary.
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Investment Returns and Safe Assets:
- The article briefly touches upon the potential income from safe and conservative assets, such as a five-year Treasury note with a 3.5% coupon rate. It discusses the possibility of generating income even if no returns are gained on investments.
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Role of Social Security:
- While Social Security is acknowledged as a retirement bonus, the article implies that with a $5 million retirement fund, individuals may not heavily depend on it.
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Geographical Considerations:
- Geographical variations in the cost of living are indirectly addressed, suggesting that while $5 million is generally substantial for early retirement, careful financial management may be needed in high-cost areas.
In conclusion, the article serves as a comprehensive guide for individuals contemplating early retirement with a $5 million nest egg. It navigates through key financial considerations, offering valuable insights and tips for a successful retirement plan.
