$5 Million Retirement in America: Is $5 Million Enough to Retire at 65?

If you’re approaching retirement with a seven-digit number in your accounts, congratulations! Only 0.1% of all U.S. households have more than $5 million in their retirement nest egg.

With reserves like these, is $5 million enough to retire comfortably? Our calculations say it’s possible. Here’s how.

How Long Will $5 Million Last in Retirement?

In the simplest terms, most Americans can comfortably retire with $5 million. If you retire at 65 and live until age 90, a 25-year retirement span, your net worth would provide you with $200,000 annually or about $16,667 in monthly retirement income.

However, whether $5 million is enough to retire at 65 depends on your desired lifestyle, the future cost of healthcare, and the number of dependents you support (e.g., spouses, children, or grandchildren). This also doesn’t account for inflation or the taxes you’ll pay on your retirement savings.

Many retirees live off the interest or distributions their nest egg generates from investment accounts, but it’s essential to understand the tax implications of these earnings. For example, just $1 million invested in an account that yields 4% would generate $40,000 annually (1,000,000 x 0.04). This is all considered taxable income, and Uncle Sam will want his cut come April.

Can $5 million last a lifetime? To answer this question more concretely, we’ll examine everything from daily expenses and healthcare costs to innovative withdrawal strategies. Keep reading to learn more.

Understanding Your Retirement Lifestyle and Costs: A Case Study

Retirement is an exciting new beginning full of freedoms and challenges. Before planning your world tours, examine expected retirement costs to determine how your financial situation will shape your day-to-day life.

To better answer the question “Is $5 Million Enough to Retire?”, we’ll study how a fictional couple, John and Lisa, will handle everyday expenses after retiring at age 65 with a nest egg of $5 million. We’ll estimate how healthcare, housing, and transportation costs might affect your saving and withdrawal strategies.

Healthcare Costs

One of the most significant expenses you’ll need to plan for is healthcare. A recent estimate from Fidelity says that the average 65-year-old retiring today can expect to spend around $157,500 on healthcare during retirement — even with Medicare coverage. Couples would need about $315,000 to fund healthcare.

While retirees enrolled in Medicare will receive coverage for hospital stays, doctor visits, and other services, older adults may still need to fund other aspects of aging, such as prescription drugs and in-home care. They’ll need to do it for about 18.9 years, according to the most recent calculations by the Centers for Disease Control and Prevention (CDC) for average life expectancy at age 65.

From a care perspective, what does a $5 million retirement look like for John and Lisa? Let’s compare three different scenarios:

• Conservative Lifestyle: John and Lisa opt for a cost-effective Medigap plan to supplement Medicare, covering additional out-of-pocket expenses like copays and deductibles. Their strategy involves investing in preventive healthcare to minimize future payments, which would keep their costs around $120,000 each for 20 to 30 years. Assuming they suffer no major health issues, their annual healthcare costs would be $4,000 each.
• Active Lifestyle: John and Lisa enroll in a comprehensive Medigap plan that offers more coverage for out-of-pocket costs and foreign travel they’re likely to need as active retirees. Their estimated healthcare costs are around $180,000 (or $6,000 yearly) each.
• Unexpected Expenses: After an unexpected chronic illness diagnosis, the couple adjusts their healthcare coverage to include more coverage and medications. Considering higher premiums and more out-of-pocket costs for healthcare services, their healthcare expenses rise to about $220,000 (or $7,330 yearly).

Housing and Transportation

Housing and transportation take up another chunk of a retiree’s budget. Housing costs typically account for 30% of your retirement budget, including mortgage and rent payments, utilities, maintenance, and property taxes.

The Bureau of Labor and Statistics (BLS) estimates that people over 65 spend an average of $18,872 per year on housing expenses, which includes dwellings, lodging, housing supplies, etc. Transportation costs amount to $7,160 annually.

Here’s how John and Lisa’s lifestyle might affect their housing and transportation budget in retirement:

• Conservative Lifestyle: John and Lisa move to a smaller home in an area with well-functioning public transportation. Their housing costs drop to $12,000, and transportation costs decrease to about $3,500 yearly.
• Active Lifestyle: They prefer to stay in their current home in a well-off neighborhood and drive their vehicle for transportation. Their annual housing costs are about $18,000, while transportation costs remain $7,000.
• Unexpected Expenses: John and Lisa relocate to a new city with better healthcare facilities due to the diagnosis. Higher property values increase housing costs to $20,000, but transportation costs decrease to $2,000 due to the availability of public transport.

Withdrawal Strategies and Savings Goals

Many financial experts recommend adopting a systematic withdrawal plan to help mitigate the risk of outliving your resources. For example, the 4% rule suggests withdrawing 4% of your retirement portfolio annually, adjusted for inflation, to balance the risk of depletion against the need for income.

For $5 million, this would mean John and Lisa withdraw $200,000 in the first year. Assuming that the average annual inflation rate is 2.5%, they’d withdraw $205,000 in year two, which would continue to rise each year at the same rate.

• Conservative Withdrawal: John and Lisa withdraw 3% annually (about $150,000), cautious of market volatility and unexpected expenses. This strategy extends the longevity of their savings, projecting their funds to last over 30 years. Taking out medical costs, housing, and transportation leaves them with about $126,500 each year.
• Standard Withdrawal: They withdraw 4% (or $200,000 yearly) based on historical market returns and life expectancy data. By doing so, they comfortably meet their annual budget needs while maintaining a healthy balance in their retirement accounts. With this withdrawal method, they have nearly $160,000 to spend yearly after healthcare and housing costs.
• Dynamic Withdrawal: John and Lisa adjust their withdrawals based on the current market conditions to help cushion against market downturns and potentially extend the longevity of their $5 million retirement fund. In the case of the unexpected moving and chronic disease scenario, the couple would need to withdraw 5% to 6% (about $250,000) yearly to maintain the same lifestyle with the same spending patterns.

Accounting for Life Expectancy and Longevity Risk in Retirement

As life expectancy increases, so does the risk of outliving your retirement savings, commonly referred to as the longevity risk. The average 65-year-old is expected to live an additional 18.9 years (and rising). To be safe, retirees might consider budgeting for a retirement that spans at least 20 years.

The following strategies might be beneficial for seniors who want to more accurately budget for a lasting retirement:

• Delaying Social Security Benefits: Your monthly stipend increases for every year you delay claiming Social Security. If you delay until you reach the full retirement age of 70, your monthly payments will increase by 32%, according to the Social Security Administration.

• Investing in Annuities: Because annuities offer a fixed income stream for a length of time, typically 10 or 20 years, investing in these assets can help extend your retirement income for longer. While annuities come with costs like commissions, annual fees, and potential early withdrawal penalties, they are particularly appealing to retirees who don’t have other stable sources of retirement income or those concerned about managing their savings.

• Maintaining a Diversified Portfolio: Padding your portfolio with a mix of assets can provide the growth potential needed to combat inflation and preserve capital over a longer lifespan. The following section will examine innovative investment strategies in more detail.

How to Invest 5 Million Dollars? 5 Investment Strategies for Retirees

Is $5 million enough to retire? Of course, it is a substantial sum, and making the money work for you could allow you to live comfortably for longer — especially when considering the potential interest on $5 million once invested.

For example, putting $5 million into a basic savings account with 0.61% APY (a low rate compared to other investment options) would generate about $30,585 annually. Brainstorming investment options that yield even better returns could go a long way toward funding retirement and making a living off the interest of $5 million easier.

In general, the earlier you start investing for retirement, the better. Let’s look at some smart strategies on how to invest 5 million dollars wisely as a retiree:

1. Building a Diversified Portfolio

Allocate your $5 million into different asset classes to minimize risks. Remember, the more diversified your portfolio, the more protected you are against market downturns.

Financial experts suggest allocating about 40% to stocks for growth, 30% to government bonds for steady income, 10% to commodities like gold for security, and 10% to 15% to cash or similar liquid assets. Portfolio allocations should vary based on risk tolerance and financial goals.

2. Investing in Real Estate

Real estate can be another innovative way to invest part of your $5 million. You can either go the traditional route and own and manage properties directly or invest in property through Real Estate Investment Trusts (REITs).

The former requires active management, but you have the potential to earn rental income. Direct ownership could be a profitable investment if this fits your desired lifestyle. Consider expenses such as maintenance and property taxes, which don’t provide much liquidity.

Alternatively, you can invest in property through REITs, which own or operate income-producing real estate. This “hands-off” approach can benefit investors with smaller budgets while still generating a steady income stream.

Like stocks, REITs are traded on major stock exchanges, offering higher liquidity than physical real estate investments. This makes buying and selling shares easier in response to market conditions. Additionally, you can use an REIT to invest in various sectors, such as residential apartment buildings, hotels, and offices.

3. Investing in Gold

Gold has historically been seen as a hedge against inflation because its price remains steady or even grows during tumultuous economic times, such as during the 2008 financial crisis, when gold’s price almost doubled.

Here are a few ways to invest in gold:

• Physical gold, like coins or bullion
• The stock of companies that mine refine, and trade gold
• Gold ETFs and mutual funds
• Gold IRA, also known as a precious metals IRA
• Futures and options

Buying gold coins and bars or opening a gold IRA can provide diversification and protect your assets from currency devaluation. A gold IRA allows you to include physical gold, such as coins or bars, in your retirement portfolio, offering the same tax advantages as traditional IRAs.

Experts advise allocating 5% to 10% of your portfolio to gold assets, as gold prices can be volatile. And unlike other investment avenues that generate income, gold only makes money if the price increases.

4. Investing in Government Bonds

Government bonds are generally considered safe investments because the U.S. government backs them. Allocating about 30% of your portfolio to government bonds can provide a steady income stream because they provide fixed interest payments throughout the term. This makes them attractive to investors who want to withstand market volatility, as the stability of these bonds can help balance the risks of other assets.

A bond’s maturity can vary (e.g., one year or 30 years). Longer-term bonds have a greater level of risk due to changing interest rates, but they also tend to offer higher yields.

5. Investing in Annuities

Annuities are contracts between the investor and an insurance company in which the insurer pays the investor a fixed or variable income stream. Retirees often use annuities to earn guaranteed income, which combats the fear of outliving their savings. 

Some see annuities as complex because of the varying payment structures and fees associated with the contract, but they can ensure guaranteed rates of return, lifetime payments, and survivor benefits.

Tax Considerations of a $5 Million Net Worth

Living responsibly through a $5 million retirement in America also means addressing the tax implications. A net worth of $5 million could put you in a higher tax bracket. Some of your retirement income could also be subject to state taxes (only seven states don’t levy an income tax). If you live in a no-income-tax state, you won’t need to pay taxes on your income from Social Security, pensions, or retirement plans.

That said, applicable retirement accounts all have different tax rates. Traditional IRAs and 401(k)s allow you to defer taxes until withdrawal, potentially at a lower tax bracket than during your working years. Conversely, Roth IRAs and Roth 401(k)s require taxes to be paid on contributions upfront, but withdrawals are tax-free in retirement, offering savings if you expect to be in a higher tax bracket.

What Does a $5 Million Retirement Look Like in America?

In general, having $5 million or more saved for retirement can provide high financial stability. However, no two retirement journeys look the same.

We asked current retirees from all across America to explain their $5 million net worth lifestyles, share their experiences, and give advice on strategically saving for retirement.

Michael Chen (70), California

Michael is a former executive at a tech company who retired with a $5 million nest egg thanks to smart investments in tech stocks and a conservative withdrawal strategy.

“Tax planning is crucial, especially if you live in California,” he shares. “California is beautiful, but it is also expensive, so you need to be ready for the high cost of living for retirees.”

Chen advises future retirees to manage their investments actively and find trusted financial advisors who will guide them through the complexities.

Harold Jenkins (78), Florida

Harold retired more than 10 years ago. He credits Florida’s lack of income tax for his ability to stretch his retirement funds further. Florida’s weather is ideal for Harold’s health, but he also cautions that the dense population in his area leads to property and living costs. He earns additional income through investments that include a mix of stocks and bonds and the revenue generated from two rental properties.

“Having a mixed portfolio has helped buffer against rising inflation and market volatility,” shares Jenkins. He adds, “Plan for higher living costs, especially in tourist-heavy states like Florida where inflation can impact daily expenses.”

Sarah and Bob Wilson (72 and 74), Arizona

Sarah and Bob, both ex-lawyers, decided to retire in Phoenix, Arizona, because of the mild winters and lower housing costs. Choosing a more affordable retirement destination has allowed their savings to last longer, travel extensively, and leave a legacy of at least $1 million to their kids.

“The key to having a smooth transition to this era of your life is to have a robust emergency fund,” says Sarah. “Unexpected home expenses can arise, and you always feel safe when you have money saved exactly for those kinds of emergencies.”

According to the couple, Arizona’s affordable living can be a plus for retirees, but you should always prepare for sudden financial needs.

For those wondering, “Is $5 Million Enough to Retire?” the short answer is yes: 5 million dollars is typically considered adequate for couples planning to retire at 60, provided they maintain an annual expenditure of $200,000 for essential living costs. However, even those with more sizable savings should account for unexpected expenses.

Retirement is not a risk-free endeavor. Wise investments and a logical withdrawal strategy can help minimize the risks, allowing you to enjoy retirement at 60, 65, or beyond without having to tighten your purse strings.