Most people have the long-term financial goal of saving for retirement. But how much you need to save is the big question. Discover whether $5 million is enough.
$5 million is enough for some people to retire on but not enough for others. It will depend largely on your planned expenses and lifestyle during retirement. It will also depend on how many people you want to support. The amount you need to retire also depends on the type of account you put the funds into.
Continue reading to learn more about whether $5 million is enough to retire on for you. We will also cover some tips to help you save for retirement, even if that $5 million goal seems unattainable.
Is 5 Million Enough to Retire?
To answer the question of whether or not 5 million is enough to retire on, you need to consider if it is just you or you and your family. Because of inflation and interest dropping, there is a reduced chance of retiring easily at 60 with five million dollars.
It is important to note that accumulating $5 million isn't an easy task. Typically speaking, you need to be making an income that puts you in the top 1%. This means you will make about $420,000 yearly. Some professions that can earn this are:
- Business owners
- Executives of large companies
- Investment bankers
- Professional athletes
How to Tell If 5 Million Is Enough for You
The biggest thing to remember is that while some people will have zero problems retiring on $5 million, others will struggle to do so. To figure out which category you fit into, you need to consider the following points.
What Is Your Why?
You will hear over and over that you need to determine your "why." This means, what are your goals for retirement? If you want to retire early, why? Do you want flexibility? Do you want more family time? More travel time? Or is it something completely different that is driving you?
Your goals will help you be motivated during your journey. Your goals may actually change as you work through different parts of your plan to save enough for retirement. You will need this focal point to get you through the sacrifices and hard work it will take to get you to having your 5 million dollars to retire on.
One of the biggest problems is that when you make more money, you tend to spend a lot more. Keeping this in mind, you need to take the time to carefully evaluate your current spending habits and how they will change during retirement. Think about things such as:
- How much do you currently pay for utilities?
- How much do you pay in homeowner-related expenses, such as property taxes and upkeep?
- Do you always drive the latest car? How much does the automobile cost you? What about the maintenance?
- How often do you travel, and how much do you spend per trip?
- How often do you eat out, and how much do you spend per meal?
- Do you like to go on shopping sprees? If so, how much do you spend, and how frequent are they?
- How much do you typically spend per year on presents for family and friends?
The above is just a few of the factors to consider. Remember that you need an accurate prediction of your expenses to determine how much you need for retirement.
Consider Where You Live
When thinking about expenses, consider where you live. If you live in a city, you will need to save more than someone in a rural area. This is also the time to consider if you will move when you retire and the cost of living in that area.
Are You Still Raising Kids?
One of the biggest factors is whether you want to retire before your kids become adults. If you have young children, some estimates indicate you spend about $36,000 on them each year. This comes from a combination of activities, childcare, food, etc.
This is why so many people decide to wait to retire until their kids are grown and have left home. They simply need income to raise kids.
What About Inflation?
One of the biggest reasons that $5 million is a good minimum goal for retirement is inflation. This combines with the recent reduction in interest rates to require more savings.
Inflation means that you need more money to buy the same things, but lower interest rates on savings mean that your principal earns you less monthly interest income. It's smart to save more than you think to account for this.
What Retiring on $5 Million Would Look Like
The best way to get an idea of whether $5 million is enough for you to retire on is to see what it would get you. Assuming you can get a 4% annual return on your retirement nest egg, you would get $200,000 per year to spend. However, it is much more likely that the figure would really be 3% or lower. To start, you would have to pay taxes on this $200,000 income.
For most people, this is more than enough to fund retirement. That is especially true if your home is already paid off so you don't have a mortgage and your kids are adults.
Do I Really Need to Save $5 Million? Can I Retire on Less?
Given that saving $5 million for retirement requires an incredibly high-paying job, it is not within the realm of reality for the average person. The good news is that you likely don't need $5 million to retire, although it would be nice.
How to Calculate Your Retirement Goal
There is one simple way to get an estimate of your ideal retirement goal. Start by tracking your expenses. Be realistic and think about any additional expenses you'll have during retirement, such as extra travel.
Then, multiply your annual expenses by 25. It is smart to add extra money to this figure for unexpected expenses or emergencies. You also need to consider the high costs of long-term care.
Remember Long-term Care
Long-term care is incredibly expensive. So, it is smart to include this in your extra expenses for your retirement goal. The following are just some estimates without insurance:
- Nursing homes – About $7,800 per month for a semi-private room
- Assisted living (one-bedroom) – About $4,300 per month
- Home health aid – About $4,500 per month
You can reduce these expenses somewhat with insurance, but it will largely depend on the long-term care insurance plan you choose and the age at which you take out the policy.
Simply put, remember to include either the cost of your long-term care itself or insurance in your estimated annual expenses, especially for your last decade or so.
How to Save 5 Million or More for Retirement
Whether or not you have decided that $5 million is enough for you to retire on, you should start saving as soon as possible, if you haven't already. The following strategies will get you on track to maximize your retirement savings.
First Things First – Start Budgeting and Tracking Your Expenses
No matter what method you decide to follow to get your finances back in order, you need to start with the basics. You need to start saving to have an emergency fund. This emergency fund will be there for your home repair, medical bills, or anything that crops up. You also want to get any high-interest credit card debt paid down or entirely off. You will have to factor in things like loan payments on mortgages or student loans.
The best piece of advice is to make sure you have a complete picture of your income, liabilities, assets, and expenses, so you can improve your finances holistically.
Regardless of where you are at with your financial journey, using a budgeting app such as YNAB (You Need a Budget) or Mint will help with some of the gaps. They can connect to your accounts and track every dollar that goes through them.
When you have an exact idea of how much you spend, you can create a better picture of how much you need to save or invest. You can also consider how much to reduce your expenses or increase your income for FIRE to become a reality.
Consider the FIRE Movement
FIRE stands for Financial Independence, Retire Early. This movement has gained exposure as more people are becoming drawn to the freedom money can give them. It is much nicer to use your time as you wish instead of living paycheck to paycheck.
There are many who have stated this method is a bit intimidating and overwhelming. This is often because many people take extreme measures and try to save half their income or more. Some people even aim to save between 50% and 70% of their paycheck. To compare, financial advisors recommend you save 15% of your yearly income to retire by 65.
This is an extreme method of saving for retirement, but it is also among the fastest ways to reach $5 million or more in your retirement savings.
Most people would be comfortable retiring on $5 million a year, but some people will need more. When calculating your ideal retirement goal, be sure to consider all of your annual expenses. Don't forget about high expenses, such as raising kids or long-term healthcare.
Similar post: Can I Retire at 60 with 500K? [PLAN OF ACTION]
Shawn Manaher is a former financial advisor, has founded 5 online businesses, and is a coach, speaker, podcast host, and author. He's been featured on The Consults Corner on TAE Radio, The Writing Biz, What's Your Story, and more.