For many pre-retirees, $5 million is often seen as a benchmark for a secure retirement. But is it enough to support the lifestyle you envision for your golden years?
Developing a sustainable retirement portfolio requires more than a large dollar amount. Many factors, such as retirement goals, hobbies, and anticipated healthcare needs, all contribute to how much you really need to retire.
In this article, we’ll cover the different variables and considerations one should review before deciding whether $5 million is enough for retirement.
Key Takeaways
- Achieving a comfortable retirement is not about a single dollar amount like $5 million - it’s about aligning your financial resources with your unique lifestyle, goals, and circumstances. Factors such as cost of living, expected longevity, and lifestyle preferences significantly influence how much you need.
- Inflation reduces purchasing power over time, while market fluctuations can threaten retirement savings. Balancing growth-oriented investments with risk management strategies ensures a retirement fund remains sustainable across decades.
- Combining smart tax strategies, diversified income sources, and professional guidance from fiduciary advisors helps retirees optimize their resources. Tailored planning ensures your retirement fund not only lasts but also supports the life you envision.
Understanding What You Need to Retire with $5 Million
Before you can determine whether $5 million is enough to retire with, it’s essential to review the factors that will contribute to your retirement spending. For example, your cost of living and lifestyle choices will impact both your current and future expenses. Another critical component is estimating your health and medical expenses, which typically increase in retirement. Finally, it’s helpful to review how your long-term financial goals, such as legacy planning and charitable giving, will affect your overall retirement expenses.
One of the easiest factors to anticipate is inflation. Over time, inflation increases the prices of goods and services. However, on a fixed retirement income, your income does not rise alongside it. As a result, the amount of goods and services you can purchase decreases. This event is typically referred to as purchasing power shrinkage.
What does this look like in practice? Let’s consider an example.
Inflation In Retirement
Michael is on track to have a $5 million portfolio when he retires in 20 years, 2045. Based on his expenses in 2024, he estimates that this amount will last. However, he did not take inflation into account. To have the same purchasing power in 20 years as he does today, Michael will need more than $5 million. At a consistent 3% inflation rate over 20 years, he will instead require a portfolio of $9,030,556.17.
In other words, his principal balance has shrunk by almost 50%. Michael thinks that $5 million will buy everything he buys today. It won’t. He’s going to have to cut his spending by roughly 50% in 20 years.
Cost of Living in Various Locations
While the general cost of living is impacted by inflation, it is also affected by geography. Where you live matters; your cost of living may be higher or lower than the national average depending on your address. For example, the living wage for a family of four in Mississippi is only $80,523, while in California, a family must earn $110,255. Furthermore, whether your region is rural or urban will affect expenses. Using our 3% inflation example from above, that means a living wage in 20 years will be $145,433 in Mississippi and $199,132 in California.
Choosing to live abroad isn’t necessarily a set way to lower your expenses. Inflation impacts your lifestyle abroad, and national tax treaties with other countries can significantly impact your cost of living.
When looking for a place to retire, housing and healthcare costs are the most significant concerns when it comes to finances. For this reason, it can be helpful to shift to a state with lower property taxes, lower housing costs, or more healthcare assistance.
It’s common to downsize or move into a retirement community to maximize your retirement fund.
Lifestyle Choices: How They Impact a $5 Million Retirement
It’s important to consider that you will likely have a fixed or limited income in retirement. We’ve written about what a good retirement income looks like but nonetheless, extensive travel or luxury living will have an impact on your retirement portfolio. High-cost hobbies may also require more funds – and this is something to plan for.
Budgeting, however, can help you identify potential hidden costs and offset expensive spending.
Withdrawal Rate and Longevity: Making $5 Million Last
Your withdrawal rate will determine how long your $5 million portfolio will last. Safe withdrawal rates range from 3% to 5%, but knowing what rate makes sense for your specific situation is important.
The other significant factor in understanding the longevity of your portfolio is your life expectancy. For those retiring at 65 and expecting to live into your 90s, it can be very easy to outlive your savings. You will want to ensure that you’ve adjusted your portfolio to cover unexpected life events and expenses over a potentially long time.
Investment and Growth Potential
Different investment strategies and how you use bonds, stocks, and real estate, can impact the growth and sustainability of retirement funds. Passive income, such as rental income and dividends, can help stretch retirement savings. However, it’s also important to plan for related taxes and expenses when managing your passive income flows.
You’ll also want to prepare your portfolio for market volatility. Diversification, asset allocation, and maintaining sufficient liquidity all play a part in reducing risk in your portfolio. While accumulating assets, it’s critical to manage return and risk. These variables are more related to growth. As you approach retirement, however, this shifts to focusing on liquidity and withdrawal needs.
In retirement, it’s helpful to retain a balance between growth and withdrawal needs. Keeping some funds in relatively stable asset categories to meet 1-3 years of withdrawal needs can help investors offset market fluctuations. There are also ways to plan for stable retirement income in a down market.
Retirement Tax Strategies to Optimize $5 Million
There are many tax strategies that retirees can use to maximize a $5 million portfolio. Tax mitigation, in particular, can help offset costs. And many retirement income sources are subject to taxes:
- Social Security: According to the IRS, around 40% of people pay taxes on their benefits. Depending on your combined income, around 50% to 85% of your income may be taxable. Combined income is defined by your adjusted gross income + non-taxable interest + ½ of your Social Security benefits.
- Retirement Accounts: Withdrawals from your traditional IRA or 401(k) are usually 100% taxable. If you withdraw funds early from your IRA while still working, you may even be subjected to a 10% tax.
- Roth Accounts: Withdrawals from Roth IRAs or Roth 401(k)s are not taxed at the federal or state level.
- Non-Qualified Investment Accounts: A “regular” investment account is sometimes called a “taxable” account. And that’s true to the extent that you earn interest, dividends and capital gains in these accounts. But, retirement withdrawals, per se, are not taxable. That can make these accounts very tax efficient sources of retirement cash flow.
- Pensions: Income from pensions are generally subjected to the 20% federal income tax withholding.
Finding methods of tax-efficient withdrawals can be extremely helpful. For example, using a Roth IRA or tax-exempt investments. Converting 401(k) or traditional IRA funds into a Roth IRA account provides lifetime value, not just retirement benefits. This is because contributing to your Roth IRA can reduce your taxes during a tax year, allowing you to save more for your portfolio.
Additional Retirement Benefits and Safety Nets
Social Security benefits are a supplement to retirement income. The more you earn, the less you need to draw on investment accounts. This impacts your withdrawal amount and related taxes. When planned for appropriately, you can avoid unnecessary or double taxation.
In other words, Social Security plays into financial security.
Other potential income sources in retirement include rental income, part-time work, or passive business ventures. Every income source outside of your investment accounts will make that $5 million go further.
Evaluating $5 Million Against Your Retirement Goals
Will $5 million be enough for your retirement fund? It can help to ask yourself these questions:
- When do you plan to retire?
- What is your estimated life expectancy?
- What are your current expenses?
- What will your expenses be in retirement?
- Based on your family history, what are your anticipated medical expenses?
- Do you plan to travel frequently?
- Do you own a home?
- Do you plan to move in retirement? If so, where?
- What hobbies or experiences do you plan to pursue in retirement?
- What retirement and/or non-qualified accounts do you have? What are the tax implications?
- Do you plan to leave a legacy?
Finding a balance between security, enjoying retirement, and leaving a legacy is crucial. To accomplish this, you may need to retire later, invest in income-generating assets, or downsize your lifestyle in retirement.
Working with a Financial Advisor for Personalized Planning
Building and maintaining a $5 million (or more) retirement fund is difficult enough, but planning for the ever-changing tax regulations can be overwhelming. For that reason, among others, many investors work with an experienced and 100% objective financial advisor.
Sadly, financial advisors are not all the same. Many of them use the title “financial” advisor” to sell products and earn commissions; the planning they do is minimal, and so are the benefits.
Financial advisors who are 100% objective, and who meet the qualifications of being fiduciary advisors, are required to work only for the client’s best interest and therefore can tailor retirement plans designed to meet each individual’s needs without any conflicts of interest or commission product sales. The help of a fiduciary financial advisor is especially beneficial for high-net-worth retirees. As we’ve written before, high-net-worth financial planning presents its own unique challenges that a fiduciary advisor can address.
Advisors not only help you plan your retirement. They can be instrumental in helping you successfully manage retirement. They help you design a financial plan, draft legacy documents, and provide in-depth insight for financial security and prosperity, and make regular adjustments to keep you on track.
Is $5 Million the Right Retirement Goal for You
There’s no “right” retirement account balance for everyone. Will $5 million be enough for you? Maybe, but that is the question which needs to be addressed. Ultimately, a successful retirement portfolio depends on your needs. Your life expectancy, expected retirement age, retirement income sources, cost of living, and inflation will all impact the number you need to retire comfortably.
Working with a financial advisor can help, as long as it is the “right” advisor. An experienced fiduciary advisor can tell you if your $5 million goal suits your retirement goals, help you build it, manage it, maintain it, and protect it for you and your heirs.
At First Financial, our team of advisors are fiduciaries, which means they are legally obligated to provide objective advice. We’ve been helping families successfully plan for, start and enjoy retirement for more than 45 years. If we can help you, or if you just want a second opinion on your portfolio, use the link below to schedule a complimentary consultation.
Greg Welborn is a Principal at First Financial Consulting. He has more than 35 years’ experience in providing 100% objective advice, always focusing on the client’s best interests.
Greg Welborn is a Principal at First Financial Consulting. He has more than 35 years’ experience in providing 100% objective advice, always focusing on the client’s best interests.
