Whether $5 million is enough to retire comfortably at age 60 depends on several factors like your lifestyle, where you live, healthcare costs, and how long you expect to be retired. With thoughtful planning, investing, and budgeting, $5 million can provide a reasonable amount of retirement income for many retirees.
How much annual income can you withdraw from $5 million?
The general rule of thumb is to withdraw 3-4% of your retirement savings each year in retirement. This withdrawal rate seeks to provide income while preserving enough of the principal for your nest egg to continue growing. Based on a 4% withdrawal rate, $5 million in retirement savings would provide $200,000 per year in retirement income.
4% Withdrawal Rate Table
| Retirement Savings | Annual Income at 4% Withdrawal |
|---|---|
| $5,000,000 | $200,000 |
A $200,000 annual income would put you in the top 5% of income earners at retirement. However, it’s important to weigh that income against your expected retirement expenses.
What are your expected retirement expenses?
To determine if $200,000 is enough, you need to estimate your anticipated retirement spending. Some major costs to consider are:
- Housing – Will you downsize or stay in your current home? Pay off your mortgage before retiring?
- Healthcare – Estimate premiums for Medicare and supplemental insurance. Factor in dental, hearing, vision costs.
- Food, clothing, utilities – Likely similar costs as when working, adjusted for lifestyle.
- Travel and entertainment – Will you travel more in retirement? Budget for vacations, dining out, hobbies.
- Transportation – Will you need to buy a new car? Remember to budget for gas, insurance.
- Unexpected expenses – Home repairs, car repairs, medical bills. Have an emergency fund.
Studies show average retirement spending decreases from about 80% of pre-retirement income for those ages 65-74 to about 70% after age 75 due to decreased spending on travel and healthcare. Your expenses may be higher or lower depending on your retirement lifestyle.
Factors that impact the $5 million calculation
Here are some key factors that can change the math on whether $5 million will meet your retirement needs:
Life expectancy and health
Your savings need to last 20-30 years or more in retirement. The longer your time horizon, the lower your safe withdrawal rate. If you live well into your 80s or 90s, it’s wise to be conservative with withdrawals. Health issues can also impact your costs and longevity.
Sequence of returns risk
If you retire and the market goes down, it magnifies the impact on your portfolio. Drawing income in down years eats into principal. A conservative withdrawal rate helps guard against this risk.
Interest rates and inflation
Low interest rates mean your savings may not grow rapidly in retirement. And as a retiree, inflation also hits harder since you are no longer earning an income. Make sure to factor in inflation when budgeting living expenses.
Social Security and pensions
Other income sources like Social Security and traditional pensions help offset how much you need to withdraw. Maximize these guaranteed income sources before tapping your $5 million nest egg.
Taxes
Don’t forget about taxes! You will owe taxes on retirement account withdrawals and investment income. Managing taxes is an important part of making your money last.
Withdrawal Rate Sustainability Table
| Withdrawal Rate | Percentage Likelihood of Success |
|---|---|
| 4% | 90% |
| 5% | 70% |
| 6% | 55% |
This table shows probabilities of retirement portfolio success over a 30-year period based on different initial withdrawal rates.
Tips for living on $5 million in retirement
To make the most of $5 million in retirement savings:
- Track your spending to create a retirement budget
- Pay off debt before retiring to reduce expenses
- Have a clear investing plan and asset allocation
- Start with a 4% withdrawal rate then adjust as needed
- Delay Social Security until age 70 if possible
- Consider annuities to cover fixed expenses
- Include health savings and emergency funds
- Be flexible – you may need to adjust your spending over time
Conclusion
$5 million can provide a substantial income in retirement for most people. However, your specific situation determines if it is “enough.” Get clarity on your retirement expenses, run different scenarios, and seek help from a financial planner to determine the best path to make your $5 million last.