Can you retire at 55 with 2 million?
A retirement account with 2 million produces a monthly annual withdrawal of $80,000 using a traditional 4% withdrawal rate. If you can live on $6,667 plus any other income sources, traditional retirement rules suggest that $2 million is enough to retire at 55.
Your expenses, chosen retirement method, plus current and future income sources all play a role in this retirement equation.
In this post, we’ll address what you’ll want to consider in evaluating retiring at 55 with 2 million if you’re in this fortunate situation. As you’ll see, some of the influencing factors are under your control, while many are not.
My husband stumbled into early retirement in midlife. The many lessons we learned are the foundation for this post, along with over 40 years of personally investing, and my financial coaching work as an AFC® (Accredited Financial Counselor).
In this article, I’ll also address:
- Various equations to see if retiring at 55 with 1 to 2 million might work for you
- Some solutions we discovered for lowering early retirement costs
- Specific retirement strategies and insights for those over 50
- My own solutions to one of the biggest expenses between 55 and 65
- What most people are missing in retirement planning
- Ways to increase income from traditional investments
- Alternative solutions to incerase income so you need less to retire
Two million dollars isn’t what it used to be, thanks for inflation! Let’s dive in to see if and how retiring at 55 with 2 million dollars might work today with several options besides traditional retirement withdrawals.
Expenses in Retirement
Expenses are an unexciting but necessary part of the initial evaluation to see if you can retire at 55 with 2 million dollars. Your expenses are the biggest underlying factor that determine when you can retire based on the savings you have since covering expenses is the foundation for what you need.
The amount you need to retire boils down to the question of whether you can cover your expenses, for life, from:
- Withdrawing from your retirement savings
- Income streams
- A combination of these two sources
So, let’s first look at factors related to spending that are sometimes overlooked and then get into specific numbers for someone retiring at 55 with 2 million dollars.
Then let’s look at the 3 sources of funds to cover your expenses.
Lifestyle Expenses
If you haven’t already, start by totaling all your current monthly expenses to see how much retirement income you’ll need to maintain your standard of living.
Lifestyle expenses are a factor of how you live. This means you have a lot of control over your lifestyle expenses.
Control is a good thing when it comes to our money. We can’t control a lot of factors that affect how long retirement savings will last, but by embracing and controlling those we can, we can change our circumstances.
Where you live is one of the biggest influences for expenses, hence the popularity of downsizing during or even before retirement. If you live in a 4000 square foot house in an expensive area, you’ll obviously need more money to retire than if you live in a low–cost area in a 2000 square foot house.
Note that in addition to increasing expenses, homes can also take up too much of net worth on a percentage basis, especially after years of home ownership. Well ahead of retiring, you’ll want to evaluate how much net worth is allocated to your home as well as how your expenses could be lowered if you moved.
Non–Recurring Expenses
Aside from monthly recurring expenses, home maintenance and property taxes are expenses that hit us once or twice a year so they’re easy to forget.
Here is a video I did on these hidden expenses in seeing how much money you need to retire.
You can also watch my video Downsizing Your Home to Increase Cash Flow below or read my article Is Downsizing Right for Me?
Inflation
Inflation is a scary factor in planning for retirement since it is completely out of our control. The result of Inflation is that you can buy less with the same amount of money.
Inflation is why 2 million won’t buy anywhere near as much as it used to. Historically, inflation has been about 3% a year.
There is no way to know for sure how much inflation will be afetr you retire, but I personally plan for at least 3% inflation.
If this sounds too complicated, no worries; most retirement calculators account for inflation. Here is a video I did on inflation.
You can also check to see how much your current spending will be after being adjusted for future inflation with this inflation calculator. You’ll definitely want to consider inflation when discerning if 2 million is enough to fund retirement at 55.
Lifestyle Inflation
Lifestyle inflation is another consideration for retirement planning. It refers to the habit of spending more money as your wealth increases.
Here’s the thing: If you’ve gotten to the point where you have 2 million dollars, your lifestyle spending has probably risen right along with your wealth. As wealth increases, almost everyone spends more simply because they can.
Inflation lifestyle is very real but it is under your control, unlike the next big retirement expense that’s subject to high inflation.
Healthcare Expenses
For someone retiring at 55, healthcare expenses can be a huge problem unless they are covered under a working spouse’s medical insurance policy. This is a challenge for someone retiring at 55, in particular, since they have ten years until Medicare kicks in.
Plus, by age 55, health issues are often beginning to increase.
Speaking from personal experience, even though I rarely go to the doctor, medical insurance and related health care costs were one of our biggest expenses after our Cobra health insurance coverage ended.
There are many variables around health care costs including your general health, prescriptions, how often you visit the doctor, and even whether you have a small business.
Since I have been managing this outrageous expense for the past decade, I can safely say that you will want to see how much your insurance will cost before you retire as it can be a deal killer. But there are some strategies that can lower health care costs in retirement which I’ll cover next since health insurance is important for everyone and it is a large expense.
Ways to Lower Medical Expenses When Retiring in 50’s
Fortunately, there are some workarounds to lower health care costs in retirement. Here are a few things I did.
Small Business Insurance
First, you have different options for insurance coverage benefits as an individual vs if you have a small business taxed as a C Corp or an S Corp.
For one thing, we were able to get much better coverage through our business vs individual plans.
Your own small business may also be able to pay your insurance premiums, so check with a CPA if you’re considering some sort of small business. This can often get medical insurance costs as a deductible expense. Even a small consulting business, hobby, or online business formed correctly can help with this; don’t discount the value of setting up a small business if your intentions and actions demonstrate you are trying to earn money from a business, regardless of the type or how small it is.
HSA’s
HSA’s (Health Savings Account) can be an indirect way to lower health care costs. HSA’s can lower taxes while also allowing you to pay for health care costs with earnings that haven’t been taxed. Unfortunately, I found that the high cost of the required “qualified” high deductible insurance plans offset the tax benefits.
I decided to forego the HSA because the tax savings didn’t offset the increased premiums for a qualified plan, especially based on how infrequently I go to the doctor or take medicine.
High Deductible Insurance
It may make sense to buy the cheapest plan you can find with good emergency coverage. I did this after a few years of high insurance premiums.
I do this now with all insurance after years of repeatedly seeing at the end of every year that my insurance covered very few expenses.
Lower Pharmaceutical Costs
Buying medication abroad might be another way to save money for medical insurance if you find a plan you like that doesn’t cover your medication.
For example, many years I bought Frova, the one prescription I take (for occasional headaches), from a Canadian pharmacy. In more recent years I have benefitted form using Good Rx to lower the cost of Frova. GoodRx costs a bit more than buying from Canada, but it’s a little easier.
Select Insurance Based on Logic and Math
I finally realized that deciding which health insurance plan to use triggered a lot of fear for me. It may for you too, since we all want good healthcare when the need arises, and the thought of not having it is scary due to the potential financial impact that could occur. Plus, who doesn’t want a doctor they like?
Insurance Broker
If you’re thinking of retiring before age 65, here is my advice: Talk to a good insurance broker with extensive knowledge on this topic. Working with an insurance broker has made the process much easier and cheaper for my family.
Medicare Costs
Be aware that Medicare may cost more than you think in planning for retirement.
For example, the amount we pay for Medicare is determined by the amount we made two years before getting coverage. This happened to be a high earning year for us, resulting in Medicare premiums that cost more than my private coverage pre-Medicare!
All these insurance related factors will be different for everyone; your tax rate, health, prescriptions and available options will help find the most cost efficient solution to get you from age 55 to age 65 when medicare begins.
There is a lot more to be said about retirement expenses we’ve but I’ve addressed the main factors which we’ve experienced that many overlook when evaluating retirement in their 50’s.
No one can argue that trimming expenses is helpful. The income numbers we’ll address next are where you can have a dramatic effect on when you can retire, however, as you’ll see.
In summary, total your expenses and prioritize them based on your life priorities. The lower they are the more likely it is that you can retire at 55 with 2 million if this is your goal.
Next, let’s address how retirees pay for all those expenses.
Retirement Method
The old way to retire was to retire at 65 and live off social security and a pension for ten or so years until you died. This is how my great Uncle Blake retired from the oil company that employed him for life. You probably have relatives that did the same.
Over the past few decades, it has become more common to plan on making retirement withdrawals to live as retirees live longer and the financial retirement services industry flourishes, aided by the blessings of the government. Two million dollars can go a long way with a retirement withdrawal strategy as you’ll see below.
The Boomer generation, in particular, has planned on the withdrawal retirement strategy. It is, however, based on spending down your retirement savings and hoping that it lasts. The reality is that retirement savings may outlive you, but they may not, and you probably won’t know until it’s too late.
“Retirement planning” is vague at best because it’s based on estimating future investment returns, inflation, future expenses, and how long you’ll live. That’s a lot of estimates!
How can all this uncertainty be overcome if you’re unsure if you have enough to retire at 55 with 2 million or any other amount?
Later generations have discovered retiring early with “side gigs”, real estate, maximizing investment income, and online businesses. This is exactly what we did, we just did it out of necessity before it became vogue.
We saw that stock dividends and bond interest alone wouldn’t support us for life, especially since we were retiring near age 50. And since we were only in late midlife, we didn’t want to start living off our savings by making retirement withdrawals.
Most retirement planning formulas are based on 30 years in retirement. If you’re 55 and live to be 95, a good possibility with medical advancements, you’re looking at 40 years of withdrawals.
Nevertheless, the retirement withdrawal method is still the goal of most traditional retirement planning. It can work great for a good investor with very low expenses and/or a lot of wealth. I can’t emphasize this enough.
Basically, retirees withdraw about 4% from their retirement savings to live each year. This withdrawal amount will need to be adjusted for inflation to maintain your buying power.
There are several problems with retirement withdrawals, however, which you can see in my video about deciding which retirement withdrawal strategy is right for you.
Next, let’s explore the math to retire at 55 with 2 million in more detail.
Retirement Withdrawals on 2 Million
If you have 2 million dollars in retirement savings and you choose a 4% retirement withdrawal method, you would withdraw about $80,000 the first year, or $6,666 each month as previously addressed.
2,000,000 * .04 = $80,000/12 = $6,666
If you plan to use a safer and more modern 2% retirement withdrawal rate, you’d withdraw about $40,000 the first year, or $3,333 each month.
2,000,000 * .02 = $40,000/12 = $3,333
This math gives you a good idea of how much money you could expect if you choose to use a traditional retirement withdrawal method and you have $2,000,000 when you retire.
Then you’d add later expected social security and any other income streams to the amount you withdraw. Ideally, the result will cover all your expenses. You can check to see if it does after addressing the expense issues presented earlier.
Note that the retirement account withdrawal is made up of a combination of stock dividends, interest, savings deposits, the growth of these over the years plus compounding. The higher the income (dividends and interest), capital gains, and compounding, and the lower the withdrawals, the lower the probability of running out of money.
This will depend, however, on how long you have held your investments, and how they have performed, which is largely a function of the economy, another factor out of our control.
Income Streams
Having “extra” income streams is where the magic is in retirement planning. This approach takes a shift from the traditional retirement withdrawal method above to capitalizing on your savings and skills to increase income streams outside of typical stock and bond income.
As you saw above, your investment income from stocks and bonds make up part of your retirement withdrawals.
These days, however, a big problem for retirees is that bond interest frequently does not beat inflation. And the dividend yield from most common income funds and dividend stocks is 3% to 4%.
To make matters worse, there may be taxes on the investment income. By considering estimated inflation of 3%, many investors are left with a paltry real income (excluding potential capital gains) of 1% to 2% from a typical investment portfolio.
So, you’re probably wondering where the magic is because it sure isn’t here.
The magic is in increasing income beyond that typical 3% to 4% with what I call uncommon income streams.
This can be done in many different ways, and it takes a bit of a shift to think in terms of an income focus. The best way for you to increase income will depend on your skills, amount of savings (capital), desired lifestyle, and many other factors as explained in my video entitled The Best Income Stream to Start before Retirement.
Let’s back up, though, and look at other ways to generate higher investment income because this is the easiest path to retire at 55 with 2 million if you have the funds and investing skills.
Traditional Investment Income
The easiest way to increase investment income is to seek out and choose higher yielding stocks and bonds. This takes some effort but not a lot.
There are financial advisors and fund managers that specialize in high yield investments. One retirement focused traditional financial advisor I read about in Barron’s, for example, achieves dividend income of 5% for her clients with a goal of at least 3% capital gains annualized from those same investments.
A 5% dividend yield, as in the financial advisor example above, would allow a retiree to withdraw 4% without even touching her investment capital. And the extra 1% would go toward financial advisor fees. Voila!
If 1 million out of the 2 million dollars in retirement savings is in less volatile dividend stocks yielding 5%, the math would look like this.
$ 1,000,000 x .05 = $50,000/12 = $4,166
Then, if you invested half the balance in bonds yielding 3%, and perhaps half in an alternative higher yielding investment yielding 9%, you could achieve a yield of 6% on the other million.
$1,000,000 x .06 = $60,000/12 = $5,000
Now we see that someone retiring with 2 million using a slightly different approach could achieve income of over $ 9,000 a month while not taking retirement withdrawals from the initial money put into their account. They would be withdrawing from the investment account, but the withdrawals would be covered by the investment income entirely.
You’re probably wondering how in the world you could get a seemingly safe 9% yield.
DIY Income Investing
Like me, you may prefer to manage your own money vs hiring a financial advisor. If so, there are investment newsletters and financial experts who focus on higher income investments.
For example, I subscribe to a service that recommends well diversified investments with a 9% income yield on average. Most, but not all of the suggestions are what I call slightly alternative investments, such as MLP’s, REIT’s, baby bonds, closed end funds and BDC’s (Business Development Companies). In this service, all the investments are ranked based on risk level.
Importantly, valuation is at the crux of the evaluation process they use with a core focus on income generating assets.
And many former wealth managers and fund managers produce commendable recommendations for high yielding investments. These are, after all, many of the same experts who were charging 1% to 2% and more to invest high net worth client money when they were working in wealth management.
It’s important to note that most of the assets which produce the income will likely increase in price during bull markets and decrease during bear markets with the exception of defensive investments which may move just the opposite (which is why we own them!).
Income from $2,000,000 in High Yielding Investments
Let’s look at another example of income from a 2 million retirement account. If you increased the yield (income) on your investments to 7% vs the common 3.5% from a typical income fund, here is the income a $2,000,000 investment portfolio would produce.
$2,000,000 * .07 = $140,000/12 = $11,667/Month
Remember, don’t confuse income with growth, which comes from capital gains, or an increase in value from the underlying investment. The value of almost all income producing investments will go up and/or down. Income is more certain than gains. Capital gains are a maybe, particularly over shorter investing time frames as is often the case with someone in their 50s looking to retire soon.
Stocks, bonds, REITs, and MLPs are all fairly common income investments. I like all of these income investments when the time is good to own them. (I no longer buy and hold investments regardless of markets and economic cycles. Instead I buy assets that are expected to increase in price while rotating out of assets set to fall based professional developed portfolios in Allocate Smartly.)
I like diversification, however, for both income and wealth building potential, even, or especially in retirement! I’m uncomfortable resting on my financial laurels based on all those estimates addressed earlier, even, or maybe especially as an older investor.
Here are three more income methods well worth exploring for someone with various levels of investment capital and time needs.
Covered Calls
If you own a stock portfolio, you can sell call options against the stocks you own.
Contrary to common belief, a covered call strategy does not increase risk from owning stocks. In fact, selling covered calls on stocks you own reduces risk since it offsets the cost of your stock position.
Selling covered calls can double, triple, and even quadruple the income received from dividend stocks!
Income of 10% to 12% in addition to dividend yield is not uncommon for covered call writing. Some financial advisors sell covered calls for their clients, although not many do so since it is difficult to sell covered calls in high volume.
It also takes a little time to manage covered calls. At least, for an individual, the time is minimal, but for a financial advisor, the time can be significant, depending on the number of clients he has. Some funds sell covered calls, but due to an option volume issue, the yield is not as good as an individual can get.
Real Estate
Real estate rental properties are an income investment that can have positive cash flow while also building wealth. For someone looking to retire at 55 with 2 million, this could be a good option, particularly for those with a fear of retirement boredom or an interest in real estate.
The key is to buy properties that do, in fact, cash flow after all expenses.
It’s important to note that there’s more work involved with real estate rentals than with passive income from stock dividends, of course. For example, I spend about two hours a month on average managing our fourplex making this is a very worthwhile income generating asset, complete with tax benefits. I also quite enjoy overseeing our rental properties as I keep delightful tenants and don’t do any of the actual maintenance myself.
With real estate, stock, and bond investing, considering valuations and cycles before buying them is an important part of building wealth outside of generating income.
Online Business
Online businesses are becoming mainstream assets as blogs and cash flowing websites are increasingly purchased by individual investors, and equity and venture capital firms.
You can buy a cash flowing online business at an earnings multiple for a fraction of the cost of a publicly trading company. Alternatively, you can start an own online business for less than $25 if you want to spend the time. Online business is where I see the best opportunity to make money now from both an income and wealth building standpoint for those with an interest in this area, based on the low required capital, low earnings multiples, and large upside potential given the risk.
Side Gigs
The younger generations are onto something here. For example, (the family of) eight year old Ryan Kaji made $29.5 million off his YouTube channel and related products in 2020 alone according to Forbes. For heaven’s sake, he got started unboxing (unwrapping) toys in only 2015, just a few years prior! If Ryan can do this, I know we older folks can add another $1,000 or $2,000 of “extra” income.
Adding small business income of any type can completely increase your ability to retire at 55 or much earlier.
And it can provide good income for current retirees, often with tax benefits when handled correctly.
While you may not want to focus on income generation in retirement, many side gigs can bring in $1,000 to $3,000 a month without a lot of work.
Starting a consulting business in the area of your career is an ideal side hustle but there are dozens of other ways to bring in extra income without having to do work you don’t like.
After you read the next section, you’ll be shocked at how generating just another $1,500 a month can affect your ability to retire at 55 with 2 million, or any other amount!
The Impact of an Extra Income Stream
Let’s say you’ve tweaked your expenses, and see that you can cover them with a retirement withdrawal of 4%. But since you’re only 55, you sensibly don’t want to withdraw from your 2 million dollar savings just yet.
So, you decide instead to increase your dividend income and also create an extra income stream of $1,500 a month from consulting.
Next, let’s equate this $1,500 a month to the amount of savings needed to generate that same amount of income each month using a 4% retirement withdrawal method.
$1,500 * 12 Months = $18,000/.04 = $450,000
This math shows that generating an extra $1,500 a month income is like having another $450,000 in savings!
This is the magic I was referring to earlier.
Below are the factors to consider that have been addressed in this post, and the amount of control investors have over each of them. We often feel like we cannot control our finances, especially in retirement. The key is to control what we can and manage risk around what we cannot control.
| Factor | Investor Control Level |
|---|---|
| Health Care Costs | Some |
| Health Insurance Costs | Some |
| Income Sources | Yes |
| Lifestyle Expenses | Yes |
| Inflation | None |
| Investment Risk | Some |
| Amount of Savings | Yes |
| Retirement Method | Yes |
| Retirement Withdrawal Rate | Yes |
| Table By Camille Gaines, AFC | RetireCertain.com |
Retiring at 55 with Two Million Summary
As you can see, if you want to retire using a traditional retirement withdrawal method, you’ll just need to see if the withdrawal of 2% to 4% plus any other income sources cover your lifestyle expenses.
This will help you see if it seems likely you’ll have enough money to cover expenses live as long as you think you’ll live.
Just remember, there are factors, such as how the economy and related stock market perform, especially right before and after you retire, that will affect the longevity of retirement investments. Unfortunately, we also have no control over this.
You can always take a more proactive approach and generate higher investment income, or use one of the other more alternative income methods presented here to lessen the likelihood of running out of money in retirement.
There’s no doubt 2 million dollars is a lot of money, but it sure won’t buy what it would buy in the past. Not only this, but if the 2 million is invested in assets that are subject to market risk, the 2 million can become 1.5 or 1 million without proper risk management. This is problematic for many stock and bond investors relying on retirement withdrawals to live after they retire.
If you’re looking to retire at 55 with 2 million, fortunately, we live in a time of incredible opportunity with many options to make that happen.
Want 33 income streams, 49 ways to lower risk, and 19 wealth building strategies that work even in your 50’s? They’re in my Utimate Wealth Plan. You can get it here now.
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Sources:
Forbes: https://www.forbes.com/sites/maddieberg/2020/12/18/the-highest-paid-youtube-stars-of-2020/?sh=4197d4ae6e50
