With $2.5 million in cash, $500,000 in IRA, and average Social Security benefits, someone who is 67 is probably in a pretty good position for retirement. However, a comfortable retirement requires more than just financial resources. It also requires balancing income and expenses. With this in mind, it may be necessary to reduce living expenses or invest to generate more income if you want to retire immediately.
Do you have questions about saving and retirement planning? Speak to a financial advisor today.
Basics of retirement planning
Retirement planning involves estimating expenses and calculating expected income. You can then decide whether your assets are sufficient to cover the costs. If the numbers don’t quite add up, there are various strategies to make ends meet by increasing revenue, reducing costs, or both.
The biggest costs for many retirees include housing, healthcare, food and travel. To reduce costs in retirement, one may need to choose to downsize or move to a less expensive location. Possible sources of income include Social Security benefits, retirement account withdrawals, investment income, retirement benefits, and annuity payments.
Can you retire?
Someone who has $2.5 million in cash and $500,000 in an IRA at age 67 can be well-positioned for retirement and a secure life with appropriate planning. Assume they receive the average monthly Social Security benefit of $1,793 per month in September 2023, earn a modest 2% annual return on their cash reserves by investing in government securities, and are finally able to withdraw from their IRA using the 4% rule, then leave it could look like this before annual income:
That equates to an annual income of $91,516. With a house paid off and no mortgage, average health care costs, and a modest cost of living of, say, $50,000 per year, this person could very well retire. In fact, they may not need to draw on much of their cash balance if they can create a plan to cover their annual costs through Social Security, IRA withdrawals, and interest income.
Bryan M. Kuderna, CFP®, founder of the Kuderna Financial Team, highlights a strategy for people with large cash reserves to help get the most out of a Roth retirement account.
“If you have significant cash, I would suggest converting some or all of your IRA to a Roth over time while in a low tax bracket with only Social Security income,” Kuderna told SmartAsset. “The income tax owed on the conversion should be paid from cash, not IRA assets.”
Significant cash reserves can also provide security against stock market volatility, but may leave the company vulnerable to the effects of inflation. So what if you still want to invest but are looking for a method that is tax efficient?
Nathaniel M. Donohue, CFP®, partner at Consilo Wealth Advisors, recommends that households with significant taxable assets consider direct indexing as a tax strategy.
“Instead of purchasing a single index fund or ETF to invest in an index, direct indexing allows investors to purchase 300-500 individual stocks that reflect the risk-return profile of the index,” explains Donohue. “This means there are hundreds of ticker symbols available to take losses on, rather than just a single index fund or ETF. In a year when the entire index is positive, there could be several, if not dozens, of individual stocks that suffer losses. Direct.” Investors can benefit from indexing [tax] Reaping losses that index fund/ETF investors simply ignore.”
Ways to extend life expectancy in retirement by reducing costs
There are a number of strategies you can implement to ensure your retirement savings last longer. Here some examples:
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Downsizing to a smaller, cheaper home: This reduces housing costs including utilities, taxes and maintenance.
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Moving to an area with a lower cost of living: Housing is the largest single item in most household budgets. It also varies the most depending on location, so you can reduce this by moving to a cheaper city or state.
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Benefit from senior discounts: There are tons of these deals out there if you look for them. You can find them on things like travel, groceries, dining, entertainment and more.
Bottom line
With $2.5 million in cash and $500,000 in an IRA, this 67-year-old appears to be in a good place to retire. However, forecasts such as these involve a number of assumptions, some of which may not occur as expected and may not be consistent with your personal arrangements.
Consider working with a financial advisor when making such retirement plans. You may also want to build in cushions for health care, housing, taxes, longevity, and market risk to help you feel even more confident about your retirement plans.
Retirement planning tips
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If you need help planning for your retirement years, a financial advisor may be able to help you. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three verified financial advisors working in your region, and you can have a free discovery call with your matching advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Image credits: ©iStock/Tassii, ©iStock/Erikapellini, ©iStock/Gan Chaonan
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