You’ve worked hard all your life, and you’ve built up a significant nest egg over the years. Congratulations. But now what? How can you transition from working and saving—to making your savings pave the way for a comfortable retirement? In this article, we review multiple strategies for retiring comfortably on $1 million, $2 million and $3 million dollars. We also share some important information on what you need to do now—especially if retirement is right around the corner.
Living Off the Dividends
There is an old adage that a comfortable retirement means building up enough savings to live entirely off the dividends or interest payments from your investments. For example, certain blue chip dividend stocks have paid steady growing dividends for over 50 years straight! However, while this can be one important part of retirement, it’s not the only way, and investors need to assess their own personal situation and determine if they are willing and able to “live off the dividends” or if there is another way.
For example, if you’ve saved up $1 million for retirement, and your dividend stocks offer a 2.5% dividend yield—that’s only $25,000 per year. Can you live off that? Do you have social security or a pension that will help supplement that income? Are you even comfortable with the constant ups and downs of the stock market? Alternatively, you could put some of your nest egg into an interest-bearing bank account, but those interest rate yields are even lower than many dividend stocks!
Price Appreciation
Unlike the “olden days,” people now live many years beyond the age they retire. For example, the annual required minimum distributions from an Individual Retirement Account (IRA) suggest the life expectancy is now often well beyond a couple decades post-retirement. And considering longer life expectancies, another good investment strategy can be to generate some of your spending cash from long-term gains on the stocks you own. Afterall, the long-term price appreciation on stocks tends to be a lot higher than just the dividend income they provide. And depending on your tolerance for short-term market volatility, long-term price gains can be another important part of living comfortably in retirement.
For a little perspective, if you have saved up $2 million for retirement—and the long-term total return expectation for the stock market is 8% (dividends plus price gains) that is potentially $160,000 per year that you can spend, on average, without the long-term balance of your account declining (short-term volatility aside).
Other Considerations
Aside from expected returns and your tolerance for market ups and downs, there are a few other basic things you should take into consideration. For example, what do you expect your retirement expenses to be? Is your home paid off? Do you need to keep a certain level of cash in your account to help you sleep well at night?
What to do Now
If you are one of the fortunate ones to have saved up $3 million for retirement, then you may be able to come close to generating the retirement income you need (from a combination of dividends and interest, plus social security benefits, and especially if you have paid off your mortgage and live conservatively), without ever having to spend down any of the nest egg that you worked so hard to build up over the years. However, everyone’s situation is different, and most people are wise to generate at least some of the income they need from a combination of sources, depending on their own unique situation.
At the very least, it is important to take stock of your current situation, including your various investment accounts (they may be spread out all over, including old 401Ks, IRAs, brokerage accounts and others), your spending habits now (and what you expect them to be in retirement), and any other big expenses that may be on the horizon. We can help you:
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Please reach out with questions. You might also consider our report: Retiring Soon? 7 Things You Need to Do Now!