How to retire with $4 million
Everyone wants to have enough money waiting for them in retirement to live comfortably. But if you’re used to a certain lifestyle, you might need a little more than the minimum amount. A nest egg worth $4 million can provide many retirees with enough money for day-to-day expenses, as well as the general freedom to do whatever they want. If you’re preparing to retire with $4 million, you’ll need to complete a number of specific tasks to ensure your continued success. You might also consider talking to a financial advisor before taking action.
Develop a financial plan
When you plan for your retirement, you are really planning for the long term. According to the 4% rule, you can withdraw 4% of your total retirement savings in the first year of retirement. After that, you can continue to withdraw the same amount, adjusted for inflation. This practice should allow your portfolio to last at least 30 years.
Suppose you want to save $4 million for your retirement. Based on this goal, you can withdraw $160,000 (0.04 x $4,000,000) in the first year. If inflation was 2% the following year, your second year withdrawal would be $163,200 (0.04 x 1.02 x $4,000,000).
But whether it will work for you will largely depend on your financial plan. These typically start with a retirement budget designed to meet your specific needs. So if $160,000 a year for the duration of retirement isn’t right for you, you need to find a budget that works for you.
Track your expenses to know your budget. This should last at least six months and take into account basic expenses (food, utilities, etc.), health costs, recreation and travel. Ask yourself if the expenses you see will last through your retirement. Also, ask yourself if you can adjust some expenses to increase your savings.
Reduce your lifestyle and living expenses
As you age, your priorities change. The big house you bought to support a family of five is getting a little too big. The stuff you’ve filled it with seems more like clutter. And it may no longer be comfortable for you if you have mobility issues.
For reasons like these, older citizens have generally downsized in the past. Some have sold their homes and moved into communities of working adults, while others have purchased smaller properties closer to loved ones. These days, however, the status quo is changing. Seniors continue to downsize, but a number of baby boomers want to stay home. According to a 2019 Chase Bank survey, out of 12,500 households surveyed (2,918 of which were led by baby boomers), 42% expect to stay in their homes.
You may feel the same way, which means you can still downsize and save money without moving. Instead, think about your current lifestyle. Reassess what you spend your money on and reallocate it elsewhere when you can. For example, you might want to go for public transport and sell your car or choose fugitive activities when dating.
Build your passive income
There are different types of “work,” according to the IRS. On the one hand, you have a material interest, which means that you have actively engaged in a commercial or commercial activity. For the IRS, material participation requires certain criteria, such as working more than 500 hours in the trade or business. This results in earned income, such as bonuses, wages, tips, salary, and commission. On the other hand, you have a passive activity.
Passive activity breaks down into two categories: any trade or business that does not meet the material standards for participation and rental activities (unless you are a real estate professional). Earning income through passive activity is one way to boost your retirement fund.
There are a variety of passive income generating options. You can choose a low-risk asset like a high-yield savings account or invest in a high-risk dividend stock. But passive income is not entirely hands-off. Rental income also counts for this and, in some cases, money from a side gig. A blog, e-book, or video channel can all contribute to passive income. Reinvestment and real estate, however, may be your best options for retiring with millions.
End the debt
The reality today is that many households face retirement with debt that threatens them. In previous decades, debt has increased dramatically, especially among older Americans. According to a 2019 Congressional Research Service (CRS) report, among households headed by someone 65 and older in 1989, 38% were in debt. This almost doubled in 2016 to 61%. The average amount also increased from $29,918 (adjusted for inflation) to $86,797.
This is partly because spending tends to rise with retirement, which is surprising. People take on additional debt, such as buying a home for retirement or when applying for a new credit card. People also make hasty decisions when they realize they haven’t saved enough. Avoid rash choices from the start.
Don’t make high-risk investments late in the game. Instead, revise your asset allocation as you age. This may require paying off high-interest debt or consolidating it at a lower interest rate early on.
Reevaluate where you choose to retire
Some states are more retirement-friendly than others. You may need to consider moving to reduce your cost of living expenses or taxes.
For example, Alaska, Florida, Georgia, Mississippi, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming have no income tax. Neither state tax on retirement income, or offer a significant tax deduction on retirement income. Along with that, they have favorable tax rates on things like inheritance, property, sales, and your estate.
On the other hand, you may also want to look at states that do not tax Social Security income. There are currently 37 states that avoid this type of taxation. Additionally, they offer a deduction on all or some forms of retirement income. You can see what each state offers in more detail here.
You might even consider moving abroad for your retirement. Some countries like Portugal, Costa Rica and Malaysia rank among the cheapest places to retire. And you can make it an adventure by exploring new cultures. However, you will need to research factors such as health insurance, legal residency requirements, and tax implications before making a decision.
Reduce your tax burden
Taxes can weigh on your finances. By moving to a lower tax bracket, however, you can save money at tax time.
One way to reduce your income tax is to make a charitable donation. Giving money to a qualified nonprofit allows you to reduce your taxable income, although you must itemize your taxes to do so. For this deduction, you can claim up to 60% of your adjusted gross income (AGI). Some wealthier people even create conservation easements. With this, you can work with a land conservation trust and receive a charitable deduction based on the value of the property.
Also, be sure to take advantage of your estate and gift exemptions. Gift tax exclusions for 2022 are $16,000 per year (compared to $15,000 in 2021) and $12.06 million over your lifetime (compared to $11.7 million in 2021), as well as your inheritance tax exemption.
But there are many ways to reduce your tax burden. You can also make contributions up to a certain limit to your retirement account, FSA or HSA. Or you can put your money in something relatively safe, like a municipal bond. Municipal bonds earn interest tax-free.
Planning for retirement is a delicate balancing act, as you will need to consider many factors. But having a specific financial goal and a plan in mind will help you prepare for retirement accordingly. Use the steps above as a basic overview to get you started on your retirement planning journey. However, if you hit a snag or just want professional help, consider talking to a financial advisor who serves your area. They can guide you through the process and find ways to help you achieve your retirement goals.
Retirement comes with its challenges. But worrying about money shouldn’t be part of it. If you want millions waiting for you when you retire, consider speaking with a financial advisor. Finding a qualified financial advisor doesn’t have to be difficult. SmartAsset’s free tool connects you with up to three financial advisors who serve your area, and you can interview your matching advisors for free to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, start now.
It is important to accumulate a savings reserve when you plan to retire. However, don’t forget to consider your social security benefits as well. Use SmartAsset’s Social Security Calculator to estimate what you might receive.
Photo credit: ©iStock.com/Fly View Productions, ©iStock.com/Gearstd, ©iStock.com/AzmanJaka
The post How to retire with $4 million appeared first on the SmartAsset blog.