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With $2.5 million in cash, $500,000 in an IRA and average Social Security benefits, someone who’s 67 is likely in a pretty good spot for retirement. However, retiring comfortably involves more than financial resources. It also requires balancing income and expenses. With that in mind, it may be necessary to reduce lifestyle costs or invest to generate more income if you want to retire immediately.
Do you have questions about saving and planning for retirement? Speak with a financial advisor today.
Retirement planning involves estimating expenses and calculating likely income. Then you can decide if you have enough assets to cover costs. If the numbers don’t quite add up, there are various strategies to make ends meet by increasing income, reducing costs or both.
The most significant costs for many retirees include housing, healthcare, food and travel. Reducing costs in retirement may involve deciding to downsize or move to a less costly location. Possible income sources include Social Security benefits, retirement account withdrawals, investment earnings, pension benefits and annuities payments.
Someone who has $2.5 million in cash and $500,000 in an IRA at age 67 can be in a good spot to retire and live securely, provided they plan accordingly. Assuming they receive the Jan. 2025 average monthly Social Security benefit of $1,929 a month, earn a modest 2% annual return on their cash reserve by investing in government securities and, lastly, withdraw using the 4% rule from their IRA, here’s how their annual income could look:
That comes out to $91,516 in annual income. With a paid-off home and no mortgage, average healthcare costs and modest living expenses of, say, $50,000 per year, this person could feasibly retire. In fact, they may not need to draw down much of their cash principal if they can build a plan to have Social Security, IRA withdrawals and interest income cover their annual costs.
Bryan M. Kuderna, CFP®, founder of the Kuderna Financial Team, highlights a strategy for those with large cash reserves that helps make the most of Roth retirement accounts.
“With significant cash, I would suggest converting some or all of their IRA to a Roth over time, while in a low tax bracket with only Social Security income,” Kuderna said to SmartAsset. “The income tax owed on the conversion should be paid from cash, not IRA assets.”
