How you can retire on $2 million

Dollar sign from 100 dollar bills

For years, financial experts have suggested a retirement savings goal of $1 million. But when you consider things like inflation, rising health care costs, and longer life expectancies, that amount of money may not go as far as you think. Pursuing $2 million in retirement savings may be more realistic or even necessary to enjoy the lifestyle you want. But is it possible to retire on $2 million, and if so, how much should you save and invest annually? And can you retire on $2 million if you start saving late or don’t make that much? Here’s an overview of what it took careful planning and work to reach $2 million.

Consider working with a financial advisor as you plot a path toward a $2 million retirement nest egg, or any amount, for that matter.

Why Retire With $2 Million?

Saving $1 million for retirement may seem like more than enough money, especially if you’re considering a more frugal lifestyle. For example, if you plan to downsize your home, cut frivolous expenses, and maintain good health to limit medical costs, then you can assume you can easily get by on $1 million.

However, it’s important to consider how far $1 million can really go in retirement. Even if you’re supplementing your savings with Social Security benefits, a pension, or an annuity, there are some things you may have no control over that could derail your retirement plans.

Developing a serious illness, for example, could lead to a stay in a long-term care facility. If you don’t have long-term care insurance, the cost of living in a nursing home could drastically reduce your retirement savings.

Then there are other things to consider such as inflation and market volatility. When prices for consumer goods and services rise, your purchasing power decreases. This means your money doesn’t go as far. If inflation is combined with market volatility affecting the value of some of your investments, this could lead to losses meaning less money to live on.

And of course, you have to consider longevity. As living to 90, 95 or even 100 becomes the norm that can put a strain on a $1 million nest egg. Without proper planning and budgeting, you are likely to run out of money sooner rather than later. All of this can make saving $2 million for retirement a more attractive goal.

How to retire on $2 million

If you want to retire with $2 million or more to your name, there are some things you’ll need to do to make it happen. Otherwise, you may not achieve your goal. Here are some of the most important things to keep in mind as you plan your retirement savings strategy.

Calculate your retirement budget

The first step to saving $2 million for retirement is determining if that’s a good number to aim for, based on what you plan to spend later. Creating a hypothetical retirement budget can help you estimate what you’ll spend year by year and what your retirement withdrawal rate should be.

Your retirement budget should include normal living expenses, including:

  • Housing

  • Utilities

  • Food

  • Transport

But you may also need to include medical and health care expenses, as well as any money you plan to spend to maintain a certain lifestyle. For example, this might include travel expenses or money you spend on hobbies.

Also, consider where debt fits into your retirement budget. If you want to retire with $2 million and no debt, then you should understand that you can save and pay off debt aggressively during your working years.

Consider your Timeline

Couple toasting their retirement with champagne

Couple toasting their retirement with champagne

Once you have a retirement budget in mind, the next step is to break down your $2 million savings goal. This is as simple as estimating how much time you need 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’ll have 40 years to save and invest. You should grow your portfolio by $50,000 per year on average. This includes money you contribute directly and earnings in your investment portfolio.

If you’re starting late, say at age 35, you’ll need to decide whether retiring at 65 with $2 million is a realistic goal. Having 30 years of savings means you should grow your portfolio by $66,666 per year on average. If you don’t think you can do that at your current savings rate and current rate of return, then you might want to consider waiting until 70 or 75 to retire to reach the $2 million mark.

Use tax-advantaged plans

Tax advantages are the first place to look to start saving for retirement. If you have a 401(k) plan at work and 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 you can add to your retirement savings fund.

After a 401(k) or similar plans, you may want to consider an individual retirement account next. Whether it makes sense to choose a traditional IRA or a Roth IRA may 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 may 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, so you’ll have to pay taxes on withdrawals from your IRA.

On the other hand, you can choose a Roth IRA if you expect to be in a higher tax bracket in retirement. And with $2 million or potentially more saved, you’re likely to save money, depending on how much you withdraw each year. In this case, you may benefit more from being able to make 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.

You can use a brokerage account to invest in stocks, mutual funds, and exchange-traded funds. Some brokerages also offer bonds, futures, options and even cryptocurrency trading if you’re looking for more ways to diversify.

Investing in stocks is especially important if you’re trying to retire with $2 million because they offer the best growth potential compared to other investments. Stocks are riskier, but the longer the time horizon for investing, the more time your portfolio has to recover from periods of volatility.

When choosing an online brokerage, be sure to pay attention to the investment option as well as the commissions you will pay for trading. Ideally, the brokerage you choose offers commission-free stock and ETF trading, which can allow you to keep more of the returns you earn from these investments.

Increase your savings rate year over year

Young man

Young man

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 you retire. Instead, you may need to save 20%, 30% or even more of your income to reach the goal. If you can’t afford to invest as much of your income now, you can increase your savings rate from year to year. For example, if you save in a 401(k) and get a 2% raise each year, you can divert that extra 2% into your retirement account. Or as you pay off debts, you can redirect the money you used to make those payments to your online brokerage account.

The bottom line

Retiring with $2 million can increase your financial security tomorrow if you’re willing to put in the effort to save and invest today. Whether it’s possible to retire on $1 million, $2 million, or more may depend on the details of your financial situation.

Tips for planning for retirement

  • Consider talking to your financial advisor about strategies you can use to save $2 million for retirement. If you don’t yet have a financial advisor, SmartAsset’s Financial Advisor Matchmaker can help you find one. You just need to answer a few short questions to get personalized advisor recommendations for your area. If you are ready, start now.

  • A key to achieving your financial goals for retirement is making sure you have the right mix of asset types. That’s where a free asset allocation calculator can come in handy.

Photo credit: ©iStock.com/Gearstd, ©iStock.com/Mongkolchon Akesin, ©iStock.com/Ranta Images

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