The target retirement savings goal of $1 million has been suggested by financial experts for years. However, when you factor in inflation, rising healthcare costs, and longer life expectancies, that amount of money may not go as far as you think. To live the lifestyle you desire, you may need at least $2 million in retirement savings. But is it possible to retire with $2 million, and if so, how much do you need to save and invest annually? When you start saving late or don’t make as much money, is it possible to retire with $2 million? Here’s an overview of how $2 million was reached with careful planning and hard work.
If you want to build a retirement nest egg of $2 million or more, consider working with a financial advisor.
Why Retire With $2 Million?
Saving $1 million for retirement may seem like more than enough money, especially if you’re thinking about living a more frugal lifestyle. It’s possible for you to assume you can live comfortably on $1 million if, for instance, you plan to downsize your home, eliminate frivolous spending and stay healthy.
Yet, it’s also important to consider how far $1 million can really go for retirement. Even if you supplement your savings with Social Security benefits, a pension, or annuities, there are things you might not be able to control, which could derail your retirement plans.
The development of a serious illness, for example, could lead to a stay in a long-term care facility. The cost of living in a nursing home could severely erode your retirement savings if you do not have long-term care insurance.
There are also other factors such as inflation and market volatility to consider. As the price of consumer goods and services rises, your purchasing power diminishes. As a result, your money doesn’t go as far. Market volatility could result in investments losing value which means that you’ll have less money to survive on if inflation is coupled with volatility.
It’s also important to take into account longevity. A $1 million nest egg can become depleted as people live to 90, 95, or even 100. If you don’t plan and budget properly, you may run out of money sooner rather than later. All of those things can make saving $2 million for retirement a more attractive goal.
How to Retire With $2 Million
When you are planning to retire with a fortune to your name, you will need to do certain things. A failure to do so may lead to failure. In planning your retirement savings strategy, here are some important points to consider.
Calculate Your Retirement Budget
Saving $2 million for retirement starts with determining whether that’s a good number to aim for, based on what you plan to spend in retirement. Your retirement withdrawal rate can be calculated by estimating your expenditures from year to year, which is accomplished by creating a hypothetical retirement budget.
In your retirement budget, you should include the normal costs of living, such as:
You should also factor in any money you spend to maintain a certain lifestyle as well as your medical and healthcare costs. Expenses such as travel and hobbies may fall under this category.
Additionally, the amount of debt you will need to retire should be considered. When you are working you need to figure out how you can save and pay down debt aggressively so you can retire with $2 million and no debt.
Consider Your Timeline
Couple toasting their retirement with champagne
Once you have a retirement budget in mind, the next step is breaking down your $2 million savings goal. This is as simple as estimating how long you have to save, based on your current age and when you hope to retire. For example, if you’re 25 now and want to retire at 65, you’d have 40 years to save and invest. You’d have to grow your portfolio by $50,000 a year on average. This includes the money you contribute directly and the earnings on your investment portfolio.
If you’re getting a late start, say at age 35 instead, you’ll need to decide whether retiring at 65 with $2 million is a realistic goal. Having 30 years to save means you’d need to increase your portfolio by $66,666 a year on average. If you don’t think you can do that at your current savings rate and rate of return, then you may need to consider waiting until 70 or 75 to retire in order to hit the $2 million mark.
Use Tax-Advantaged Plans
Tax-advantaged plans are the first place you may look to start saving for retirement. If you have a 401(k) plan at work and you want to save $2 million for retirement, maxing out contributions each year could help you get there. If your plan includes an employer matching contribution, that’s free money that you can add to the retirement savings pot.
After 401(k) or similar plans, you might consider an individual retirement account next. Whether it makes sense to choose a traditional IRA or a Roth IRA can depend on your current tax situation and where you expect to be tax-wise in retirement.
If you’re in a higher tax bracket now, you might find the deduction allowed for traditional IRA contributions valuable. Of course, this depends on whether you expect to be in a lower tax bracket when you retire, at which time you’d have to pay taxes on withdrawals from your IRA.
On the other hand, you may choose a Roth IRA if you anticipate being in a higher tax bracket in retirement. And with $2 million or potentially more saved, it’s possible that you might be, based on how much you withdraw each year. In that case, you may benefit more from being able to take tax-free withdrawals from a Roth IRA.
Invest in Stocks With an Online Brokerage Account
Contributing to a workplace retirement plan or IRA is a starting point but you may need to expand your investment options to reach your $2 million retirement goal. Opening an online brokerage account allows you to continue building your portfolio, beyond the annual contribution limits for tax-advantaged plans.
Stocks, mutual funds, and exchange-traded funds can all be purchased with a brokerage account. If you want to diversify further, there are brokerages that offer bond trading, futures trading, options trading, and even cryptocurrency trading.
It’s especially important to invest in stocks if you’re trying to retire with $2 million since they offer the best growth potential. A longer investment horizon means your portfolio has more time to come back from volatility, even though stocks are riskier.
If you’re looking for an online brokerage, pay attention to the investment selection and the fees you’ll have to pay to trade. If you choose a brokerage that offers commission-free stock and ETF trading, you can keep more of the returns you earn from your investments.
Increasing Your Savings Rate Year after Year
Saving 10% to 15% of your income is a commonly accepted rule of thumb for retirement planning. But saving that amount may not be enough if you’re trying to reach $2 million in assets by the time retire. Instead, you may need to save 20%, 30% or even more of your income to hit the target. If you can’t afford to invest that much of your income now, you can increase your savings rate year to year. For example, if you’re saving in a 401(k) and you get a 2% pay raise each year you can divert that extra 2% to your retirement account. Or as you pay off debts, you can redirect the money you were using for those payments to your online brokerage account.
The Bottom Line
Saving and investing now will result in financial security tomorrow if you retire with $2 million. Whether it’s possible for you to retire with $1 million, $2 million or more can depend on the details of your financial situation.
Tips for Retirement Planning
To save $2 million for retirement, talk to your financial advisor about the strategies you can use. If you don’t have a financial advisor yet, SmartAsset’s financial advisor matching tool can help you find one. You just need to answer a few brief questions to get personalized advisor recommendations for your local area. Take action now if you are ready.
Invest in a variety of asset classes so you can reach your retirement goals. That’s where a free asset allocation calculator can come in handy.