$2 Million in Retirement Savings: Here’s How Much You Could Withdraw Per Year

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So you have $2 million in retirement savings. But what does that actually mean for how much you can afford to withdraw per year during retirement?

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To figure this out, you should first examine how $2 million compares to the average retiree. Then, figure out how much to withdraw per year using one of several methods.

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How $2 Million Compares to the Average Retiree

The Federal Reserve estimates that the average American retiree has $255,200 in retirement savings by retirement age, according to Forbes. This includes employer-sponsored retirement plans, such as 401(k)s, and individual retirement accounts, such as traditional IRAs, Roth IRAs or SEP IRAs.

So, if you have $2 million in retirement savings, you are well ahead of the average American retiree.

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How Much To Withdraw Per Year

There are several ways to determine how much money you should withdraw each year during retirement. The amount you should withdraw depends on your spending habits, savings and life expectancy. You can calculate your withdrawal amount based on the average expenses of other retirees, the 80% rule, the 4% retirement rule or with help from a financial advisor.

“Calculating the optimal withdrawal involves a thorough assessment of your financial needs, long-term goals and risk tolerance,” said Nathan Jacobs, senior researcher at The Money Mongers.

Average Expenses

According to the Bureau of Labor Statistics, the average expenses of someone 65 and older in 2021 were $52,141 per year, or $4,345 monthly. This number will likely decrease as you age: People between the ages of 65 and 74 spent an average of $4,870 per month, while people 75 and older spent an average of $3,813 per month.

The average monthly spending for retirees is helpful, but it doesn’t necessarily indicate what your retirement will look like. You must look at your spending today to determine how much you’ll need during retirement.

80% Rule

You can use the 80% rule to determine how much money you’ll need during retirement. This rule starts with the idea that you should expect to use 80% of your pre-retirement income to cover expenses in retirement. This percentage factors into the equation that some pre-retirement expenses might fall off, like clothing or work commute costs, while others might increase, like travel and additional healthcare.

The most significant expenses that most people will have in retirement include housing, transportation, healthcare, food and utilities.

4% Retirement Rule

The 4% retirement rule states that you should only withdraw up to 4% of your retirement savings each year to make your savings last for 30 years. This calculation should also adjust for inflation annually, which is supposed to help you avoid running out of money in retirement.

According to the 4% retirement rule, if you have $2 million in retirement savings, you could withdraw $80,000 annually. This would last 25 to 30 years, depending on inflation. If you want the savings to last longer, you should withdraw less than $80,000.

The 4% rule has some stipulations, though. It assumes that your investment portfolio contains about 60% stocks and 40% bonds and that you will keep your spending at a similar amount throughout your retirement. However, it doesn’t account for changing market conditions, different asset allocations or changing spending patterns.

“The widely referenced 4% rule suggests an initial withdrawal of $80,000 per year, adjusted for inflation annually,” said Jacobs. “However, this is merely a guideline, and the perfect withdrawal rate ultimately depends on your specific age, life expectancy, desired lifestyle and investment strategies.”

A Financial Advisor

A financial advisor can provide more accurate and personalized estimates for how much you should withdraw each year during retirement.

What Is the Best Way To Save for Retirement If You Want More Money?

The best way to save for retirement is to start as soon as possible. Whether you have plenty of money for retirement but want more or don’t think you will have enough for retirement, the earlier you start saving, the more time your money has to grow due to compounding interest.

If you are younger, a good goal is to save your salary by the time you turn 30. For anyone of any age, try to save between 10% and 15% of your annual income for your retirement. A financial advisor can help you set retirement goals and develop a plan to meet those goals.

“If $80,000 per year is not enough, there are a few options to consider,” said Julia Mathers, marketing executive at Pasha Funding. “One is to reduce expenses and live within the means of the retirement savings. Another is to invest a portion of the retirement savings in a diverse portfolio to generate additional income. Lastly, individuals can also consider delaying retirement or working part-time to supplement their income.”

The Bottom Line

Retirement savings are very individualized. One person’s retirement may look very different from another’s, due to different health conditions, savings, lifestyles, spending habits, financial situations, costs of living and goals. You should determine how much to save and spend during retirement based on your situation.

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