For some people, $3 million sounds like a lot. If you’re in that group, you probably think $3 million is enough for retirement. But retiring at 65 with $3 million may be enough, depending on your life expectancy, lifestyle, and other factors. Let’s break down what you need to consider when determining how much you can afford.
A financial advisor can help you create a financial plan to meet your retirement needs and goals.
5 factors to consider when planning your retirement
Knowing how much you need for retirement can be difficult because there are so many variables. Here are five general things to consider:
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Life expectancy: Thanks to medical advances and improved nutrition, people are living longer today than they used to. Life expectancy has dropped slightly in the age of COVID—for women, the age dropped from 79.9 years in 2020 to 79.1 years in 2021, and for men, it dropped from 74.2 to 73.2 years over the same period. But those numbers could rise again as COVID subsides. Since people are living longer, long-term planning is best.
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inflation: Many things are uncertain, but one thing is certain: Inflation is likely to persist even in so-called normal economic times. While the COVID pandemic era saw historically high inflation, the Federal Reserve targets a modest 2% inflation. However, in January 2023, inflation was 6.4%, so you need to plan accordingly.
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Cost of living: Like inflation, the cost of living increases over the years. However, the cost of living can vary greatly depending on certain factors, such as where you live. For example, some states have more retiree-friendly taxes. This is also why some couples whose children have left home decide to move to cheaper areas.
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Health costs: Health care costs tend to rise with age, as seniors often require more medical care than younger people. Retirees must therefore factor rising health care costs into their retirement planning.
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Social Security: Social Security benefits can provide a source of income in retirement. However, the amount of Social Security benefits you receive depends on your employment history and the age at which you begin receiving benefits. Use our Social Security calculator to estimate your benefits.
By considering these five factors in your retirement planning, you can better estimate your future income needs and develop a plan to achieve your retirement goals.
How much do you need for a comfortable retirement?
In the previous section, we briefly summarized some things you need to consider when planning your retirement. Now we should estimate the actual amount of money you will need for retirement and see if $3 million is enough.
Of course, discussing these things broadly and calculating them are two entirely different things. Fortunately, retirement calculators allow you to input many of the things we discussed earlier. SmartAsset’s retirement calculator asks you key questions, such as where you live, when you plan to take Social Security, and what retirement income you want. It then estimates how much you’ll need to retire and how much you’ll need to save per month to reach that goal.
Retirement calculators can help you understand the real numbers, but you should also meet with a financial advisor to create a personalized plan.
Strategies to maximize retirement savings
Saving $3 million for retirement is an ambitious goal, but it may be necessary depending on what you put into the calculator (and the plan you develop with a financial advisor). If so, there are steps you can take to maximize your retirement savings.
One of the most important concepts here is to use compound interest to your advantage. Compound interest means that you continue to earn interest on the interest you have earned in the past. In other words, the more time passes, the faster your portfolio grows. So the more time you have, the greater the effect of compound interest. Even if you can only save a small amount each month, starting early can make a big difference in the long run.
It’s also a good idea to max out retirement accounts like a 401(k) or an IRA. You can contribute up to $22,500 per year to a 401(k) and up to $6,500 per year to an IRA (as of 2023). Maxing out these accounts can help you save more in taxes and grow your retirement savings faster.
You should also diversify your investments by investing in stocks, bonds and real estate. This has several benefits, for example, these assets often have different volatility profiles. But they can also have different tax advantages, so you have an advantage if you invest in more than one.
A financial advisor can help you develop a suitable retirement strategy. Contact a financial advisor today.
Bottom line
Knowing if $3 million is enough to retire at 65 can be daunting. There are factors to consider, such as inflation, cost of living, life expectancy and healthcare costs. But plugging numbers into a retirement calculator can help you see where you stand. You should also meet with a financial advisor to create a customized plan. If you need to save more, you can maximize your retirement accounts. Also, be sure to start saving early and diversify your investments.
Tips for retirement planning
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A financial advisor can help you make important financial decisions, such as determining your investment strategy. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area. You can interview the advisors you find for free to help you decide which one is right for you. If you’re ready to find an advisor who can help you reach your financial goals, get started now.
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Deciding how to invest can be challenging, especially if you don’t know how much your money will grow over time. SmartAsset’s investment calculator can help you estimate how much your money will grow, so you can decide what type of investment is right for you.
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Have an emergency fund ready in case unexpected expenses arise. An emergency fund should be liquid – in an account that is not exposed to the risk of large fluctuations like the stock market. The downside is that the value of liquid cash can be eroded by inflation. However, a high-yield account allows you to earn compound interest. Compare savings accounts from these banks.
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The post “Is $3 million enough for retirement at 65?” first appeared on the SmartAsset blog.