At what age should you have $1 million in retirement?

Your comfort during retirement depends on several factors. For example, your retirement savings, any source of income, and your age are all important. Without a doubt, it's possible to retire comfortably in this scenario. However, it's a good idea to review your spending, tax, health care, and other factors as you prepare for your retirement years. Many people retire with less money, but they may not have the same expenses or needs as you.

For example, they may live in a cheap place, have excellent health, or keep costs down in some other way. Why is it important? Because you have more assets than the average person, you may need to plan for taxes and “resource tests” during retirement. In addition, it could be simply interesting. You'll likely pay taxes on a portion of your Social Security benefits because of your savings. This is because withdrawals from pre-tax retirement accounts, such as an IRA, 401 (k), or 403 (b), generally increase your taxable income.

When that happens, your income can reach levels that cause the IRS to include part of your Social Security income in your taxable income. Keep in mind that if your only source of income is Social Security, you don't usually owe taxes on that income. In addition, withdrawals from Roth accounts can help you avoid paying Social Security taxes. So how can you reduce the taxes you pay for Social Security benefits? With some strategies, you can manage the amount of taxable income that appears on your tax return, or at least partially control the timing.

If all goes well, you can minimize your tax impact (you may only pay taxes on 50% of your benefits, or even none of them). That said, don't necessarily expect to receive all of your Social Security income tax-free. It's possible to do it, but the cost of making it happen may or may not be worth it. Ultimately, the idea is to take income selectively when it makes the most sense.

When you turn 73, the IRS requires you to withdraw funds from certain retirement accounts before paying taxes. That age increases over time and eventually reaches 75 years as a result of SECURE 2.0 legislation. Presumably, that money has never been taxed before, so these RMDs generate taxable income. Unfortunately, large amounts of RMD can cause your income to increase substantially, placing you in a relatively high tax bracket. RMDs are usually taxed as ordinary income (unless they come from Roth accounts and are eligible to be exempt from taxes), which can increase taxable income on your return.

This can be an unpleasant fact, especially if you don't need the RMD money. Again, this can be a good problem, as it means that you have saved enough money to generate a significant RMD. But you are not powerless in the face of large retailers. Instead, you can proactively withdraw funds from accounts before paying taxes in low-income years.

For example, when you stop working, you are likely to have a lower income than you had in your higher-income years. This can be an excellent time to approach distributions strategically. How much should you take? It depends on several factors. For example, you might want to “cover a low tax bracket.” But if you don't need the money to spend, Roth conversions are also worth exploring so that any future growth can stem from your tax-free accounts.

By reviewing your income annually, you may be able to determine a reasonable amount to withdraw. Other strategies, such as QLACs and QCDs, could also help you manage the impact of RMDs. In that case, it might be reasonable to retire. But there are a lot of unknowns and you could still run out of money.

For example, if markets behave badly, inflation derails your plans, or you have to face long-term care (LTC) expenses, the plan may not work. How long will you live? Do you have equity in your home as a backup? There are many other considerations that deserve careful attention. The above assumptions should appear in the calculator below. Play with numbers to analyze some personalized hypothetical scenarios and make the plan more resilient.

The calculator below is a basic retirement calculator. But try the early retirement calculator if you plan to delay receiving income for several years. It will likely take at least a few years for you to qualify for Social Security benefits. Some people like to use retirement rates to estimate how much of their savings they can spend. The so-called “4% rule” is probably the most popular (and controversial) general rule.

However, it's just a research finding, not a rule that professionals recommend following. The 4% withdrawal rate is the result of research on how much money you can “safely” withdraw during retirement (the safe thing is between contributions because there are no guarantees in life and you can always run out of money). According to that research, Bill Bengen discovered that, if he had withdrawn 4% or less of his initial balance, his money would have lasted 30 years in the worst of historical scenarios. Once again, the research looked at the worst possible scenarios.

Therefore, in many cases, you could have successfully withdrawn more than 4%. There is now an impassioned debate about the 4% rule. Some say that the number is too high and that it cannot be expected to work in current and future environments. Others argue that the study still has value and that worst-case scenarios don't always happen. All that said, it's an oversimplified way of looking at things.

I repeat, I don't know anyone who actually uses the rule. Instead, I see customers withdrawing their savings at varying rates. In some years, they retire at high rates, and things usually slow down. In addition, it may not make sense (or be unrealistic) to make linear inflationary adjustments every year. Before you turn 70 and increase your income, you'll withdraw funds at a relatively high rate.

But that could be fine, as long as you have a decent plan and it works. As an “early retiree,” you may need to do additional planning regarding your health coverage. Retiring at 60 means you probably have five years left until you're eligible for Medicare. At that time, medical care is fairly simple, though you'll want to evaluate supplemental coverage and keep abreast of any changes. Each option has advantages and disadvantages. Ultimately, it's wise to explore all the options and decide what's best.

Even if your job offers coverage for retirees, it may not be your best option, so compare prices. Still, it's possible to get surprisingly low health coverage premiums. That might make sense for a few years, especially when you're over 60 and coverage can be expensive. You may be able to withdraw funds from pre-tax accounts later, after age 65, if needed.

However, it's critical that you're aware of your Medicare premiums. If you receive too much income after age 63, you could increase your premiums because of the IRMAA. Ultimately, all of these moving parts work together, and it's essential to have an overview. For example, your health insurance decisions may affect your taxes and vice versa.

This is an important milestone in your life. If you need help in any way, a second opinion, detailed analysis, or ongoing investment advice, I may be able to help. Send me an email to start the conversation. And if you found this information useful, you'll get a lot out of the educational email series, which is available at no cost. Registration does not imply a certain level of skill or training.

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