If you plan on having $3 million in savings by the time you turn 55 and you’re wondering if you can retire on that amount, then there are some things to consider. From understanding what your costs will be in retirement to determining how to invest your funds before and after retirement, there’s a lot to get right to make sure you can reach your financial goals.
If you’re not sure how to get started, consider working with a financial advisor.
Why Retiring at 55 Costs More
While $3 million is a pretty penny, people often calculate their Social Security checks and free Medicare into their retirement plans. You can’t do this if you want to retire at 55, as Medicare won’t kick in until you’re 65and you won’t qualify for full Social Security payments until you’re 66 or 67, depending on your birth year.
While Medicare can’t be rushed without a serious disability, you can opt to start taking your Social Security benefits when you turn 62—but that will still leave seven years of retirement when you’ll be paying for your insurance and medical expenses out of pocket.
And of course, retiring early usually means a longer retirement. If you’re retiring at 55 instead of 66, you have 11 extra years of expenses and 11 fewer years of income that your savings will need to cover. The good news: As long as you plan carefully, $3 million should be a comfortable amount to retire on at 55.
How to Plan Your Retirement
To plan your retirement on $3 million, you’ll need to face your mortality. Let’s say you expect to live an average lifespan of 79 years. That means your $3 million will need to last you 24 years.It’s not quite as simple as taking $3 million and dividing it by 24. First of all, there’s your current lifestyle and the lifestyle you want to live in retirement. If you’re currently living a frugal lifestyle and don’t have any plans to change that after you leave the workforce, $3 million is likely more than enough. But if you hope to keep your big house and nice cars and travel widely, $3 million might not be enough.
You also need to consider taxes. According to FINRA, the Financial Industry Regulatory Authority, there are five major tax areas that impact retirees:
- Social Security taxes: Yes, you may owe taxes on your Social Security benefits. It depends on your overall retirement income and your tax status—whether you file joint or separate returns. You can use this worksheet from the IRS to figure out if your Social Security benefits will carry a tax.
- Pension taxes: If you’re lucky enough to have a pension, you’ll owe income tax on it the year you withdraw the money.
- Retirement account taxes: While Individual Retirement Accounts (IRAs) are taxed upfront, you’ll owe taxes on the earnings the year you withdraw them. Say you deposited $20,000 but with earnings, you now have $30,000 in your IRA. While the taxes on the $20,000 are already paid, you’ll need to pay taxes on the additional $10,000 when you pull out the funds. On the other hand, 401(k), 403(b) and 457 plans are pre-tax instruments, so you’ll owe income tax on the amounts you withdraw from them each year.
- Estate planning: Facing retirement includes the task of facing your mortality and you might begin to think of what money or other assets you hope to pass on to your loved ones.
- Other taxable accounts: If you also have index funds, managed accounts, exchange-traded accounts or other savings, the tax bill only becomes more complicated.
How to Retire on $3 Million
To retire at 55 with $3 million with confidence, you’ll need to have a good financial plan. Here are some steps to take to make sure that you’re able to retire with the savings that you’ve accumulated:
- Lower your cost of living: If you’re worried about making $3 million last, you can cut your costs significantly by downsizing your home, moving to an area with a lower cost of living and paying off debt before you retire.
- Diversify your investments: $3 million may seem like a lot of money, but it won’t do you much good just sitting in your checking account. Use retirement accounts like an IRA or a 401(k) to reap the benefits of lower taxes and employer matches. Investments like index funds are also an excellent choice for retirement since they have a low cost and generate steady returns. Bonds, CDs and annuities are other investments you can consider that can generate stable income.
- Get expert advice: A financial advisor will be essential in creating an investment strategy if you want to retire early.
The Bottom Line
Retiring early is a worthy goal, but even with millions of dollars in savings, it can be challenging. It’s important to plan ahead carefully and bring in an expert if needed so you can enjoy a long and peaceful retirement without nasty financial surprises. Understanding what your expenses will be in retirement is the first step to calculating whether you have enough money or not.
Tips for Retirement Planning
- When you’re planning out your finances for retirement it can be as important to look at spending in retirement as it is how much money you need to save until then. A financial advisor can help you with both and maximize your potential to meet your retirement goals. 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.
- If you’re not sure how much you need to have saved for your golden years, consider using SmartAsset’s free retirement calculator.
Photo credit: ©iStock.com/Vadym Pastukh, ©iStock.com/shironosov, ©iStock.com/izusek
