Retiring on $2 million doesn't sound half bad, right? It's $1 million more than what most financial experts have traditionally recommended and roughly 684% more than what most Americans have saved by the time they reach retirement age, which is about $255,200, according to the Federal Reserve. But will $2 million really last you the full length of your retirement or should you be saving more? Let's take a look.
It depends on your annual expenses
The best way to determine how long $2 million will last is to estimate how much you'll spend each year in retirement. Easier said than done, but to get a rough idea you can use the 80% rule, which states you'll need about 80% of your pre-retirement annual expenses for each year of retirement.
By way of example, let's look at how much the average American household spent in 2021, which was about $67,000, according to research from The Ascent. If we take this number as your pre-retirement expenses, then 80% would be $53,600. Assuming that's how much you'd spend in retirement, you could live for about 37 years on $53,600 per year with a nest egg of $2 million (assuming that $2 million is earning 0% and not factoring in Social Security). If that holds true for you, you could retire at 63, and live on $53,600 each year until you turned 100.
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Not bad, right?
Of course, that doesn't factor in inflation. In fact, if you were to retire even 15 years from 2021, $53,600 would be about $79,544 in 2036 dollars, assuming a 2.5% inflation rate from now until then. Using that as your annual expenses, you could retire for about 25 years on $2 million. Still not bad, but retiring at 63 would mean you would outlive your retirement savings if you lived past age 88.
Another potential limitation with using the 2021 average household expenses is that it includes $1,885 for housing and $913 for transportation. Some retirees, however, will have paid off their homes and cars and will no longer need to commute for work, drastically reducing how much they spend on both. Conversely, the estimate may not be enough for food ($691) or healthcare ($454), so the expenses you scrap could be balanced by new expenses.
So is $2 million enough to retire?
The golden number here might be $57,000. If you were to retire at 65 and live for at most 35 years, you would need to keep your annual expenses at or below $57,000 to live on a $2 million nest egg, assuming you don't live past 100.
This would put you in a great position to retire comfortably. In fact, according to research by the Motley Fool, the average retiree today spends about $48,872 per year in retirement. At $57,000, you would have more than enough, with about $8,000 as a cushion.
As noted above, inflation could make this tricky, as the longer you live, the less spending power your money has. Fortunately, you can use certain income-producing assets, like annuities and CDs, that have low risks and can help you at least keep pace with inflation and hold on to your purchasing power for longer. You'll also likely be eligible for Social Security.
As far as saving $2 million for retirement, it's a challenge. You'll likely need to open a brokerage account and invest a portion of your annual income in stocks, bonds, and various types of funds, like ETFs and mutual funds. It's also a good idea to take advantage of employer-sponsored retirement plans, like 401(k)s, especially if your employer will match some of your contributions.
The earlier you start investing, the more time you give your money to grow. You might not be able to sock away $2 million from your salary alone, but with the power of compound interest, you could amass a significant amount to retire comfortably.
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