Is $2.5 Million Enough to Retire at 50?

Whether $2.5 million is enough to retire at 50 depends on your situation, financial goals and expected lifespan. Other factors like healthcare costs, inflation, market downturns and estate planning needs will also factor into the equation. We’ll look at the key factors and how someone retiring at 50 with $2.5 million might build a sustainable income strategy. Consulting a financial advisor for a personalized plan can also be a significant benefit in this process.

Retirement Income From $2.5 Million

A $2.5 million nest egg might sound like plenty, but how long it lasts depends on your expenses and lifestyle in retirement. As you estimate how much income you’ll need your portfolio to generate each year, don’t forget to factor in your Social Security benefits and any other income sources, including pensions and part-time work.

So how much can you afford to withdraw each year? That will depend on your underlying investments, the returns they generate and how long you anticipate living.

Following the 4% rule, a person with $2.5 million in a balanced portfolio could expect to withdraw $100,000 in their first year of retirement and then increase withdrawals each year based on inflation. Historical data suggests a retiree can withdraw 4% per year—adjusted for inflation—for 30 years without likely running out of money.

However, alternative withdrawal strategies may provide more flexibility and potentially higher income. Keep in mind that the 4% rule assumes your spending habits will remain relatively static throughout retirement, which may not be the case for you. A financial advisor can help you evaluate different withdrawal strategies and their potential impact on retirement income.

Potential Impact of Healthcare Costs

Medical and long-term care can be significant expenses as you age. According to the Employee Benefit Research Institute, a couple enrolled in a Medigap plan with average premiums will need $366,000 in order to have a 90% chance of covering their medical expenditures in retirement. Some couples may even need almost $430,000.

These costs can have a significant impact on your retirement income, especially if you do not have long-term care insurance or other healthcare funding options.

Long-term care insurance is one option to help cover healthcare costs. This type of insurance typically covers services that Medicare may not cover, such as nursing home care, home healthcare and assisted living. However, long-term care insurance can be costly and not everyone qualifies for coverage.

Potential Impact of Inflation

The Bureau of Labor Statistics reported that the annual average inflation rate in the U.S. between 2000 and 2020 was approximately 2.07%. But inflation has run significantly higher in recent years and is something you should account for in your retirement plan.

To protect your retirement income from inflation, consider implementing strategies such as investing in Treasury Inflation-Protected Securities (TIPS) or real estate investment trusts (REITs). These investments can help hedge against inflation and help maintain your purchasing power over time.

You’ll also need to account for rising costs in your withdrawal strategy. If you follow the 4% rule, for example, you would withdraw 4% of your portfolio in your first year of retirement and increase your distributions in subsequent years by the annual rate of inflation.

Potential Impact of Market Downturns

Market downturns can decrease returns and lower confidence in future investments, potentially affecting your retirement income. To mitigate risk, diversify your investments across various asset classes, such as stocks, bonds, real estate and commodities. Examples of low-risk investment options in each asset class mentioned include:

Stocks: Established companies with dividend-paying stocks or blue-chip stocks.
Bonds: U.S. government bonds and high-quality corporate bonds with lower risk ratings.
Real estate: Real estate investment trusts (REITs) or diversified property holdings.
Commodities: Low-cost, index-based ETFs or physically backed funds.

While diversification doesn’t eliminate risk, it helps by spreading assets across investments with different return profiles. Additionally, diversification within each class can help reduce the impact of market downturns on your portfolio and retirement income.

Potential Impact of Longevity

Longevity risk, or the possibility of outliving your savings, is a crucial factor to consider when determining if $2.5 million is sufficient for retirement. The U.S. Census Bureau projects the number of Americans aged 65 and older will nearly double in the decades ahead, going from 49 million in 2016 to 95 million by 2060.

Financial strategies to account for increased life expectancy may include investing in annuities, which are insurance products that convert savings into lifetime income. Examples of different types of annuities include fixed annuities, variable annuities and indexed annuities, each with their own pros and cons. Annuities can provide a steady income stream that lasts as long as you live, thus helping ensure that you have enough income to sustain you throughout your retirement, even if you live longer than expected.

Factor in Estate Planning

When deciding if $2.5 million is enough to retire at 50, consider your goals for inheritance, legacy and charitable giving. If these are important to you, you may consider setting up a trust, creating a will, purchasing life insurance or establishing a donor-advised fund.

Estate planning attorneys and financial advisors can help you build a plan that reflects your financial, legacy and giving goals. Seek professional advice to create an estate plan that aligns with your retirement objectives.

Other Considerations

Retiring with $2.5 million requires more than just investment and withdrawal planning. Factors such as where you live, how your income is taxed, and the future of programs like Social Security can all affect how far your savings will go.

A Tax Foundation analysis of IRS data indicates that the average federal income tax rate was 14.9% in 2021, while the top 1% of taxpayers paid an average rate of 25.9%. Your effective tax rate in retirement will depend on how your income is structured, particularly the balance between taxable and tax-advantaged accounts.

The cost of living also plays a significant role in how long your savings will last. For example, a $2.5 million retirement fund may stretch further in Topeka, Kansas, compared to Honolulu, where the cost of living is 26% higher.

Potential changes to Social Security should also be considered, especially for those retiring early. If benefits shrink or face delays, retirees may need to depend more on personal savings.

Bottom Line

Ultimately, determining whether $2.5 million is enough to retire at 50 depends on your personal financial situation and goals. Start by considering all the factors discussed above and remember that consultation with a financial advisor can help you create a tailored retirement plan that accounts for factors such as healthcare costs, inflation, market downturns and estate planning goals.

Retirement Planning Tips

Retirement planning can be complicated and confusing. A financial advisor can help walk you through the process so you can retire with confidence. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
Figuring out how much you need to save to support your desired lifestyle in retirement is crucial. SmartAsset’s retirement calculator can help can provide an estimate of how much you’ll need based on your projected spending, when you plan to retire and where you live.