6 Surprising Insights Into a $5 Million Retirement — And How You Can Get There, Too


Ridofranz / Getty Images/iStockphoto

Ridofranz / Getty Images/iStockphoto

Retiring with a $5 million nest egg is a significant financial achievement, providing the opportunity for a comfortable and fulfilling retirement. There are movements promoting retirement savings known as FIRE (Financial Independence, Retiring Early) and FatFIRE for individuals targeting a nest egg of $2.5 million or more.

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While experts say that most Americans can retire comfortably with $1.9 million, more ambitious individuals choose to set more aside. Strategic planning and financial acumen are required well into the retirement years to make the most of this substantial savings amount. Here’s more on what it looks like to retire with $5 million — and how to set goals to get there.

1. They Sacrificed and Saved for Years

Individuals who were able to save millions for retirement did so by minimizing spending and debt — and maximizing savings early on to watch their money grow. Money gurus such as Dave Ramsey encourage aggressively saving 15% or more of your income to reach the target. Doing so for 30 years could ensure a retirement fund of $2.48 million.

Even if you’re off to a late start in your retirement-funding journey, it’s still possible to reach a sizable nest egg by lowering your spending and maxing out your tax-advantaged retirement accounts such as 401Ks, IRAs and more.

2. They Live on $200,000 or Less Per Year

One of the reasons that the $5 million retirement target is desired is the interest earnings. The average annual interest rate on investments can vary based on market conditions and the chosen investment vehicles. Assuming a conservative yearly interest rate of 4%, a $5 million portfolio could generate $200,000 in interest income annually. For most retirees, the six-figure income is enough to live comfortably and travel in their golden years — without touching their $5 million savings.

This passive income can significantly cover living expenses, reducing the need to dip into the principal. However, should market conditions be less than favorable at retirement or unforeseen expenses pop up, many retirees have the 4% rule to fall back on. If they limit principal withdrawals

3. They Continue to Manage Their Investments During Retirement

Markets and inflation can be volatile, which can be catastrophic to individuals living off savings and investments. To protect and maximize their $5 million, a well-thought-out retirement investment strategy that evolves with economic conditions is crucial.

Many high-net-worth retirees employ a financial advisor to oversee their funds or actively manage their portfolio to ensure it’s diversified to adapt to the times.

In addition, they make strategic withdrawal strategies to minimize tax implications. Roth IRA conversions, tax-efficient fund placement, tax-loss harvesting and managing capital gains can all contribute to optimizing their tax situation in retirement.

4. They Spend Significantly on Insurance, Including Health Care Coverage

Retirees with assets often have a variety of coverages to protect their nest egg, often in higher-than-average amounts. Some of the most common include:

  • Health insurance: High-net-worth retirees may opt for a more comprehensive private health insurance plan. Or their higher annual income rules out Medicare, forcing them to go private or buy supplemental health insurance and prescription drug coverage such as Medigap or Medicare Advantage (Part A, B and C).

  • Long-term care insurance: This coverage can protect retirement savings from being depleted by significant healthcare expenses. Given that healthcare needs may increase with age, long-term care insurance helps cover the costs of assisted living, nursing home care or in-home care services.

  • Life insurance: While the primary purpose of life insurance is often income replacement during the working years, it can still be relevant in retirement. Life insurance can serve as a tool for wealth transfer, helping beneficiaries cover potential estate taxes and other expenses.

  • Homeowners or renters insurance: Coverage can protect against losses due to property damage, theft or liability claims. Ensuring that the home is adequately insured provides peace of mind and financial protection.

  • Auto insurance: If the retiree owns a vehicle, maintaining auto insurance is essential. This coverage protects against potential accidents, damage to the vehicle, and liability claims.

  • Umbrella insurance: For added protection, retirees may have umbrella insurance to cover lawsuits and claims that exceed the limits of other insurance coverages.

  • Travel insurance: Retirees who plan to travel extensively may elect for coverage that includes trip cancellation protection, emergency medical coverage, repatriation back home and coverage for lost or stolen belongings.

5. They Still Rely on Social Security and Other Income Streams

While $5 million provides a robust financial cushion, additional income streams can enhance financial security. Social Security benefits, pension payments, property rental income and even part-time work can supplement their retirement income.

6. They Have a Legacy Plan In Place

Legacy planning becomes an unavoidable consideration for those retiring with a significant portfolio. Establishing a comprehensive estate plan that includes wills, trusts and beneficiary designations ensures that wealth is transferred according to their wishes without loved ones having to deal with probate.

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How To Save $5 Million Dollars for Retirement

If you’re inspired by the approach of dedicated individuals who save big for retirement, here are some tips on how you could start now to join the high-net-worth club

1. Start Early, Stay Consistent

The power of compounding is a fundamental principle in wealth accumulation. Starting to save for retirement early on allows you to build the habit and watch your money grow exponentially over time. Consistency in contributions, even if they are smaller in the beginning, can significantly impact the final retirement fund.

2. Maximize Retirement Accounts

Take full advantage of tax-advantaged retirement accounts, such as 401(k)s and IRAs. Contribute the maximum allowable amount each year to benefit from tax-deferred growth.

3. Let Your Employer Help

Many employers offer 401-K matching, which could double the amount you set aside each month towards retirement. Be sure to max out the contribution to meet your goal sooner.

4. Diversify Your Investments

A diverse investment portfolio is crucial for managing risk and optimizing returns. Allocate your investments across different asset classes such as stocks, bonds, real estate and alternative investments. When you’re younger, you can be more aggressive with your investment strategy (such as stocks), slowly adjusting your portfolio towards safer vehicles as you approach retirement (such as CDs and bonds).

5. Consider Entrepreneurship

For some, entrepreneurship can be a path to accelerated wealth accumulation. Starting and growing a successful business can generate additional income and create value contributing to your retirement fund. However, entrepreneurship comes with its own set of risks and challenges, requiring careful consideration.

6. Avoid Debt

Unnecessary spending and debt reduce the amount you could save towards retirement. Set a budget and focus on saving aggressively towards your retirement goals — the sacrifice will pay off in the long run.

7. Consider Your Location

The cost of living can vary significantly depending on where you choose to live and retire. Research and consider relocating to an area with a lower cost of living to save more and stretch your retirement funds further –additionally, factor in state taxes, healthcare quality and overall lifestyle.

Takeaway

Individuals who retire on $5 million aren’t all that different from the average person. In many cases, they learned to live a frugal life on a strict budget to maximize their savings for retirement. Although they may have more financial freedom in their later years, they still keep their spending under control to avoid drawing down their principal balance.

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