You’ve done it, you reached millionaire status and saved $2 million in your retirement savings. No matter your cumulative retirement plans or other investment decisions, you’ve successfully reached this goal.
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While you’ve probably figured out your retirement withdrawal strategies by this point, you should examine how $2 million compares to the average retiree before you get started. With a nest egg this large, you likely won’t have to rely heavily on social security benefits, so long as you can make your money last.
The next step is figuring out how much you can really afford to withdraw each year in retirement, and whether that will be enough for you to live comfortably well into your golden years.
The Federal Reserve estimates that the average American retiree has about $255,200 in retirement savings by retirement age, but age plays a huge variable. Retirement savings includes employer-sponsored retirement plans, like 401(k)s, and individual retirement accounts, such as traditional IRAs, Roth IRAs or SEP IRAs.
So, if you have $2 million in retirement savings, you are well ahead of the average American retiree. However, here are a few takeaways according to the Survey of Consumer Finances:
The average retirement savings for all families is $333,940, whereas the median retirement savings for all families is $87,000.
The median retirement savings for those in the age group 55 to 64 is roughly $185,000.
If you reach age 65, the median savings is around $200,000, and if you are 75 or older, the median retirement savings is about $130,000.
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There are several ways to determine how much money to withdraw each year during retirement. The amount you should withdraw depends on your spending habits, required minimum distributions, income tax rates, savings and life expectancy.
You can calculate your withdrawal amount based on the average expenses of other retirees, the 80% rule, the 4% retirement rule or with help from a financial advisor.
“Calculating the optimal withdrawal involves a thorough assessment of your financial needs, long-term goals and risk tolerance,” said Nathan Jacobs, a senior researcher at The Money Mongers.
According to the Bureau of Labor Statistics, people 65 and older spend an average of $49,279 in total annual expenditures, which is about $4,107 each month. However, expenditures declined from $56,267 for the 55-to-64 age group to $36,673 for the 75-and-older group. Older households spent $6,066 on food, ranging from a high of $6,800 for the 55 to 64 age group to a low of $4,349 for the 75 and older group.
Knowing the average monthly spending for retirees is helpful, but it doesn’t necessarily indicate what your retirement will look like. Look at your spending today to help you determine how much you’ll need during retirement.
You can also use the 80% rule to determine how much money you’ll need during retirement. This rule starts with the idea that you should expect to use 80% of your pre-retirement income to cover expenses in retirement.
This percentage factors into the equation that some pre-retirement expenses might fall off, like clothing or work commute costs, while others might increase, like travel and additional healthcare. The most significant expenses that most people will have in retirement include housing, transportation, healthcare, food and utilities.
The 4% retirement rule states that you should only withdraw up to 4% of your retirement savings each year to make your savings last for 30 years. This calculation should also adjust for inflation annually, which is supposed to help you avoid running out of money in retirement.
According to this rule, if you have $2 million in retirement savings, you could withdraw $80,000 annually. This would last 25 to 30 years, depending on inflation. If you want the savings to last longer, you should withdraw less than $80,000.
The 4% rule has some stipulations, though. It assumes that your investment portfolio contains about 60% stocks and 40% bonds, and that you will keep your spending at a similar amount throughout your retirement. However, it doesn’t account for changing market conditions, different asset allocations or changing spending patterns.
“The widely referenced 4% rule suggests an initial withdrawal of $80,000 yearly, adjusted for inflation annually,” said Jacobs. “However, this is merely a guideline, and the perfect withdrawal rate ultimately depends on your specific age, life expectancy, desired lifestyle and investment strategies.”
A financial advisor can provide more accurate and personalized estimates for how much you should withdraw each year during retirement. The money you invest upfront into these products and services can only serve to grow your wealth exponentially in the future.
The best way to save for retirement is to start as soon as possible. Whether you have plenty of money for retirement but want more or don’t think you will have enough for retirement, the earlier you start saving, the more time your money has to grow due to compounding interest.
If you are younger, a good goal is to save your salary by age 30. For anyone of any age, aim to save between 10% and 15% of your annual income for retirement. A financial advisor can help you set retirement goals and develop a plan to meet those goals.
“If $80,000 per year is not enough, there are a few options to consider,” said Julia Mathers, a marketing executive. “One is to reduce expenses and live within the means of retirement savings. Another is to invest a portion of the retirement savings in a diverse portfolio to generate additional income. Lastly, individuals can also consider delaying retirement or working part-time to supplement their income.”
The bottom line is that retirement savings are very individualized, and the suggestions above are for illustrative purposes only. One person’s retirement may look very different from another’s, due to different health conditions, savings, lifestyles, spending habits, tax-deferred accounts, living costs and goals. You should determine how much to save and spend during retirement based on your situation.
Caitlyn Moorhead contributed to the reporting for this article.
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This article originally appeared on GOBankingRates.com: $2 Million in Retirement Savings: Here’s How Much You Could Withdraw Per Year
