One of the biggest fears retirees have is outliving their money. It can force them to return to work, make significant sacrifices to their lifestyle, or turn to family just to survive. Setting the goal too low can make you financially vulnerable, but if you set the goal too high, you may never end up retiring.
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A $2 million nest egg may be all you need to retire. That’s because of a few key variables that come to fruition as you get older. Having this target in mind can help you maintain strong financial discipline as you progress toward your goal.
Most Retirees Have Paid Off Their Homes
If you are retired, chances are you have paid off your mortgage. More than 60% of retirees are in that category, according to U.S. Census Bureau data cited by Construction Coverage. You will still have to contend with property taxes and home maintenance costs, but getting rid of your mortgage is a big deal that makes retirement much easier.
Retirees may also opt to downsize their homes, making it even easier to get out of debt. The family home that once fit four children may feel empty when the children have started their own families. Selling the family house and getting a one-floor house may make more sense for people as they get older, since this move reduces costs and minimizes the risk of falling.
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Traveling and Other Expenses Go Down
Health care is one of the few expenses that tends to go up as you retire, but you can keep that cost low if you eat healthy and get regular exercise. However, people often cut back on traveling as they get older, which can significantly trim your monthly expenses. You may also cut back on entertainment as you get older. For instance, music concerts appeal to young adults, but as people get older, those types of entertainment become less attractive.
Reducing your monthly expenses is a key part of ensuring that your nest egg lasts. You shouldn’t cut down on the essentials, but as you get older, a greater portion of discretionary purchases make less sense. Transportation costs may also decrease as older retirees tend to stay home more often.
Why $2 Million?
Two million dollars is a good nest egg for most people due to their declining expenses and the 4% withdrawal rule. This rule stipulates that you withdraw 4% of your portfolio each year and assume that it will grow back by at least 4% per year.
Using this popular rule, you can tap into $80,000 per year, which comes to $6,667 per month. If you qualify for the highest Social Security benefit, you’ll receive more than $10,000 per month altogether. Most retirees aren’t spending anywhere close to $10,000 per month, which makes a $2 million nest egg sufficient for most individuals.
If you already have a $2 million nest egg, you should still build your retirement accounts. Don’t stop contributing, but you can also spend some money on experiences and things that you enjoy. There’s no need to save every cent you earn at the risk of not living an enjoyable life. Building up to $2 million at an early age gives you more flexibility, and once you reach that benchmark, you should set more ambitious goals.
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This article originally appeared on GOBankingRates.com: Why You Should Aim for $2 Million in Retirement Savings
