With $2.5 million in cash and $500,000 in an IRA, should I retire at 67?

With $2.5 million in cash, $500,000 in an IRA, and average Social Security benefits, someone who’s 67 is probably in a pretty good place for retirement. However, retiring comfortably involves more than financial resources. It also requires balancing income and expenses. With this in mind, you may need to reduce your lifestyle costs or invest to generate more income if you want to retire immediately.

Have questions about saving and planning for retirement? Talk to a financial advisor today.

The basics of retirement planning

Retirement planning involves estimating expenses and calculating likely income. Then you can decide if you have enough assets to cover the costs. If the numbers don’t add up, there are various strategies to make ends meet by increasing revenue, reducing costs, or both.

The most significant costs for many retirees include housing, healthcare, food and travel. Cutting costs in retirement may involve deciding to downsize or move to a less expensive location. Possible sources of income include Social Security benefits, retirement account withdrawals, investment income, pension benefits, and annuity payments.

can you retire

Someone who has $2.5 million in cash and $500,000 in an IRA at age 67 can be in a good place to retire and live safely, provided they plan accordingly. Assuming they receive the average monthly Social Security benefit in September 2023 of $1,793 per month, they earn a modest 2% annual return on their cash stash by investing in government securities and eventually retire using the 4% rule of IRAs, here’s what their annual income might look like:

That’s an annual income of $91,516. With a paid-for home and no mortgage, average health care costs, and modest living expenses of, say, $50,000 a year, this person could retire. In fact, they may not need to draw much of their principal in cash if they can build a plan so that 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 high 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 told SmartAsset. “The income tax due on the conversion should be paid out of the cash, not the IRA assets.”

Substantial cash reserves can also provide safety against stock market volatility, but leave it open to the effects of inflation. So what if you still want to invest, but are looking for a tax-efficient way to do so?

The story continues

Nathaniel M. Donohue, CFP®, partner at Consilio Wealth Advisors, recommends that households with significant taxable assets consider direct indexing as a tax strategy.

“Instead of purchasing a single index fund or ETF to invest in an index, direct indexing allows investors to buy 300-500 individual stocks that mirror the risk/return profile of the index,” explains Donohue. “This provides hundreds of ticker symbols to harvest losses, rather than a single index fund or ETF. In a year where the entire index is positive, there could be several, if not dozens, of individual stocks that are losing. Direct indexing allows investors to take advantage of (tax) loss harvesting that index fund/ETF investors simply pass on.”

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Ways to extend your retirement longevity by cutting expenses

To help your retirement savings last longer, there are a number of strategies you can implement. Here are some examples:

• Downsize to a smaller, cheaper home: This lowers housing costs, including utilities, taxes and maintenance.

• Move to an area with a lower cost of living: Housing is the largest item in most household budgets. It also varies the most by location, so you can reduce this by moving to a cheaper city or state.

• Take advantage of senior discounts: There are plenty of these deals available if you look for them. You can find them in things like travel, food, dining, entertainment and more.

Conclusion

With $2.5 million in cash and $500,000 in an IRA, this 67-year-old appears to be in a good place for retirement. However, forecasts such as these involve a number of assumptions, some of which may not materialize as expected and may also not be aligned with your personal arrangements.

Consider working with a financial advisor when creating plans like these for retirement. You may also want to build cushions for health care, housing, tax, longevity and market risks to help you feel even more secure in your retirement plans.

Retirement Planning Tips

• If you need help planning your retirement years, a financial advisor can help. Finding a financial advisor doesn’t have to be difficult. The free SmartAsset tool matches you with up to three verified financial advisors serving your area, and you can have a free introductory call with your matched advisors to decide which one you think is right for you. If you’re ready to find an advisor who can help reach your financial goals, get started now.

• SmartAsset’s Social Security Calculator helps you answer the question of how much you can expect in Social Security benefits.

• Keep an emergency fund handy in case you face unexpected expenses. An emergency fund should be liquid—in an account that isn’t exposed to significant fluctuations, such as the stock market. The trade-off is that the value of liquid cash can be eroded by inflation. But a high interest account allows you to earn compound interest. Compare savings accounts from these banks.

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